Photo via freiheit.org.
Argentina is in financial trouble again. Some might say “what else is new?” The country has seen this movie many times before. However, I would argue that the outcome of the current economic predicament in Argentina is more relevant to the world than it has ever been.
Why it matters
Argentina is a beautiful country, plentifully endowed with vast and fertile land, oil, and gas, as well as rare and common minerals the world needs. This richness could turn Argentina into a proxy battle ground for the trade and technology war between the US and China. Some argue it already has. In 2024, Argentina’s soybean exports to China amounted to $1.3 billion. This pales in comparison to the exports of soybeans to China from leftist leaning and neighboring Brazil, with $30 billion. However, Argentina could bolster soybean production and exports to China manyfold from current levels, given idle capacity. In the “wrong” hands, Argentina could turn to China as the Trump administration attempts to help competing US soybean farmers. Also, the estimated 199,000 metric tons of rare earth minerals in Argentina is another area of interest for the US as it seeks to increase access to these resources and reduce dependence on China, which holds more than 40% of the world’s total.
Economic and strategic considerations align the Trump administration with President Milei’s. These alone could justify the US administration’s promise to do “whatever it takes” to support Argentina, as recently uttered by US Treasury secretary Scott Bessant. There is an important geopolitical political angle as well. The large economies in Latin America, including Brazil, Mexico, Colombia, and Chile, have elected left-leaning populist governments. Therefore, the success of Argentina’s brand of strong government and libertarian economics could have a demonstration effect in the region. For example, Brazil will have presidential elections in the fall of 2026, and Milei’s success could help elect a center right candidate and defeat President Lula and the PT.
The success of Milei’s economic program would achieve what no other emerging economy has. Namely, that painful economic reform can happen within democratic and open societies. To put in the old Russian dilemma terms, Milei’s success would show that it is possible to believe that Perestroika (restructuring) is not incompatible with Glasnost (openness). This is no small issue as 72% of the world’s population lives under centralized, non-democratic regimes. On average over the last 75 years, these regimes have outgrown democracies by 1.5% per annum including China and 0.5% excluding China, in real terms.
Alternatively, the collapse of Milei’s plan for Argentina would make it more likely for the PT to stay in power in Brazil while reassuring other leftist governments around the world. On the other hand, Milei’s failure would render his free markets approach at best impractical in open societies and democratic societies, and at worst also theoretically suspicious.
The four sins of Milei’s program
President Milei was able to generate a great deal of support in and outside of Argentina not only because the Argentinean population was tired of decades of hyperinflation and stagnation, but because his diagnosis of the key problems in Argentina was correct. Namely, Argentineans have for many decades been living beyond their means. To sustain this standard of living, corrupt politicians borrowed money and used these monies to create a bloated system of social transfers. The fear of losing these transfers induced voters to elect politicians who kept the system going. At some point, the amount of debt would render it unpayable, and the country would either default on its obligations outright or end up with hyperinflation as the central Bank would finance deficits by printing money, or both. Two previous attempts also had the correct diagnosis. First, under the presidency of Carlos Menem and finance minister Domingo Cavallo, the Convertibility Plan of 1990-91 temporarily pegging the peso 1-1 to the USD was attempted. Secondly, under President Mauricio Macri 2015-19, Argentina experimented with pro-market reform. In both cases, political support did not survive the social hardship caused by these policies.
To his advantage, Milei was an outsider in Argentinean politics. His irreverent style, coupled with convincing academic argumentation, persuaded voters that he could, at last, bring redemption to this battered country. His iconic chainsaw came to represent not only his promise of cutting bureaucracy, but also the hope for a deep and long-lasting cut with the past.
Hindsight is of course 20-20, and I won’t pretend to have seen the current crisis ahead of time. A review of the causes, however, can inform the prognosis and offer important lessons for the future. The following are, in my view, Milei’s mortal sins:
- Milei underestimated the political risk of corruption scandals. Milei was often criticized for his eccentricity and arrogance, but he was praised for his profound dislike of official corruption. When allegations of corruption in Milei’s government surfaced in early September many inside and outside Argentina were shocked and disillusioned. The allegations involved recordings suggesting kickbacks to Milei’s chief advisor (and sister) Karina Milei and other government officials. There is not a final verdict on the accusations. However, these allegations may have played a role in his party’s defeat in the local election in the populous Buenos Aires Province in early September. In those elections Milei’s party, La Libertad Avanza (LLA), was defeated by the opposition led by left-leaning Axel Kicillof.
- Milei underestimated the political backlash of his fiscal adjustment. Milei achieved a 30% budget reduction in 2024 and the country’s first primary budget surplus fiscal surplus in decades. However, the percentage of Argentineans living below the poverty line rose from about 27% of the population in 2019 to 57% in 2024, the first full year of Milei’s administration. Analysts believe the ratio will decline to 32% in 2025. If the estimates for 2025 are confirmed, it would mean progress indeed, but it would still mean that 1/3 of the population will be below the poverty line.
- Milei allowed too much appreciation of the peso in real terms. Under the Milei administration, inflation declined meaningfully, but it remained above that of its main trading partners. This led to real appreciation and fueled speculation that an adjustment would be necessary to close a widening gap between the official and floating (blue) peso/USD rate. In late September the government started to ration USD sales. As of this writing the government has not allowed this adjustment in the FX, for fear that it would undermine LLA’s performance in the legislative elections this Sunday. The offer of financial support by the Trump administration slowed the reserve erosion but did not stop it. In hindsight, Milei should have asked for a line of credit from the US Treasury or the IMF early in the year. Mexico, Colombia, and Chile have had a flexible credit line (FCL) with the IMF. Creating and activating these types of lines of credit at the height of emergencies often proves too late and only provides liquidity for more asset sales. Given that a downward adjustment of the peso is widely expected by the markets after the election, I question who would want to buy assets with exposure to the peso.
- Milei underestimated the cost of his arrogance. Milei’s sense of intellectual and moral superiority, coupled with his aggressive communication style, may have contributed to the alienation of important segments of the political establishment, including those who on an ideological basis could have been willing to support his policies.
Prognosis
This Sunday legislative elections will make or break Milei’s program. If LLA and its allies do not obtain enough seats to be a “blocking minority” or 33% of the deputies, it will be difficult to pursue Milei’s program as envisioned. In this scenario, confidence would likely plunge, and Milei’s plan will join the list of failed attempts to fix the economy of Argentina.
There are not reliable polls for these types of legislative elections in Argentina. As of October 22, only three days before the election, the firm Polymarket strongly favored the opposition to hold most seats. However, a more granular read of polls and voting history by province and region made by AI suggests a 70% probability of reaching the needed one-third. Therefore, not all is lost for Milei yet. He still could emerge from the ashes, like a phoenix.
President Trump may have attempted to scare voters into supporting Milei when he said that if Milei “loses” (whatever he meant), the US would no longer support Argentina. Trump may have even raised Milei’s chances at the polls. However, Trump also increased the market’s downside if Milei loses, thus complicating the risk/reward calculation. If we take the probable post-election devaluation of the peso into account, my calculations lead me to a slightly negative pay from a bet on Milei’s program surviving.
If Milei’s party is defeated on Sunday, it would eventually produce an Argentinian government that is less friendly to the US. A severe currency and financial crisis in Argentina has the potential to engulf Brazil, putting pressure on the real. Even the Mexican peso could come under pressure, as investors flee from Latin America risk. China will be there, ready to offer its help and further extend its influence in the region. Even the US dollar and equities could come under pressure as investors understand the ramifications of having the three largest Latin American economies pursue leftist agendas and move further away from the US. In this scenario, Argentina could be the proverbial canary in the mine.
It is in the hands of the Argentinean voters this Sunday to decide what kind of bird Argentina becomes. It matters a great deal for the world.
Jorge Mariscal is a professor at the Columbia University School of International and Public Affairs and a member of the Global Americans International Advisory Committee.
