Following eight decades of socialist policies, Argentina is undergoing its most intense economic experiment since the 2001 currency crisis. When President Javier Milei took office, he inherited a staggering macroeconomic challenge. Inflation was soaring at 230%, the highest in the world, and public debt surpassed 60% of GDP. Additionally, the exchange rate gap between the official and unofficial exchange rates exceeded 200%, while over 40% of the population lived in poverty, and the unemployment rate stood at 7.7%. 

Rooted in his libertarian “anarcho-capitalist” ideology, Milei is boldly and unapologetically committed to free-market principles. He views the state as inherently harmful and acknowledges only the maintenance of public order and the legal system as legitimate functions of government. His goal is to reform Argentina from the ground up. Early in his presidency, he introduced the "Ley Bases" bill with over 600 reforms, along with an emergency decree named the Decretos de Necesidad y Urgencia (DNU), which included 300 additional measures. However, his party, La Libertad Avanza (Freedom Advances), lacks a parliamentary majority and must rely on moderate Peronist lawmakers for support. While initial attempts to pass his proposals failed, by July, Milei successfully pushed through approximately 200 reforms with the backing of these Peronists moderates.

Source: Tomas Cuest, Getty Images

Reducing state spending

During his political rallies, Javier Milei was frequently seen wielding a chainsaw, a dramatic gesture symbolising his commitment to cutting government spending and dismantling bureaucratic excess. True to this symbolism, Milei implemented bold austerity measures immediately after assuming office. He began by abolishing or merging several ministries, such as combining education, research, culture, and social affairs into a single Human Capital Ministry. Ministries seen as unnecessary or ideologically driven, such as the Ministry of Women, Gender, and Diversity, were scrapped entirely. In less than a year, he closed 13 of 22 government ministries, cut the federal budget by 32%, and laid off approximately 10% of federal employees, amounting to nearly 30,000 positions.

Additionally, public sector wages and pensions have been kept below inflation, social benefits like subsidies for food, energy, and transport have been sharply reduced and infrastructure projects, state-led in the past, now require private financing. To achieve further budget reductions, Milei adopted a constitutionally controversial approach by deferring payments from the central government to the provinces. He also issued warnings to governors, particularly those opposing his policies, threatening financial consequences for lack of support. Recently, Milei shifted his attention to the nation’s largest tax agency. By removing tax officials, he perceived as barriers to entrepreneurship and economic growth, he sent a clear message: his reforms are about liberating the economy, not just reducing costs. 

The unexpected rise of Javier Milei underscores the growing influence of right-wing populist movements worldwide such as leaders in Italy, the United States, and India. President Trump described Milei as his "favourite president," highlighting their shared political vision. This connection positions Milei as a potential influencer in the upcoming U.S. administration, particularly in relation to the Elon Musk and Vivek Ramaswamy-led Department of Government Efficiency (DOGE). Musk reportedly consulted Argentina's Minister of Deregulation for insights into the country’s aggressive spending cuts. Reports indicate that Musk, along with Vivek Ramaswamy is spearheading an aggressive effort to reduce federal spending by $2 trillion. DOGE appointees will be embedded in federal agencies to determine “the minimum number of employees” needed for essential functions. he plans involve large-scale layoffs, voluntary resignations prompted by a strict return-to-office mandate, and agency relocations outside Washington.

Source: Reuters

Dollarisation

Central to Milei’s economic reform agenda is dollarisation, which he presents as a long-term solution to Argentina’s chronic inflation and monetary instability. While he campaigned on promises to eliminate the Argentine central bank and fully replace the peso with the U.S. dollar, his approach in office has been more measured. One of his first actions was to devalue the peso by 50%. His administration also proposed a dual-currency model, allowing both the peso and the dollar to circulate as legal tender, giving Argentines the option to choose the currency they trust more.

Milei suggested also removing capital and exchange controls, which he sees as artificially supporting the peso while harming economic competitiveness. There are early signs of progress, the gap between the official exchange rate and the black-market dollar has narrowed from 60% in January to 20% in October.

Critics highlight that while Milei has kept most of his promises, but full dollarisation remains a distant goal. The U.S. dollar operates as a parallel currency and it is widely exchanged alongside Argentine pesos and used in private transactions and savings, but it is not yet recognised as legal tender for paying taxes or settling debts.

Source: Reuters

One year into Javier Milei’s presidency, the economic “shock therapy” is beginning to yield tangible results. Inflation, Argentina’s most persistent challenge, started to ease. As of October, monthly inflation fell to 2.7%, down from 3.5% the previous month, marking its lowest level since 2021. The annual inflation rate dropped below 200% for the first time in nearly a year, with further declines anticipated as the effects of the previous government’s high inflation cycle phase out of annual calculations. Food price increases slowed but rent and energy costs continue to rise at higher-than-average rates.

For the first time in 12 years, Argentina achieved a budget surplus, with public finances recording a surplus of 1.7% of GDP in the first nine months of this year, compared to a 4.6% deficit at the end of 2023. The country’s EMBI index, a measure of sovereign risk, dropped from 1,920 points when Milei assumed office to 984 in October. Additionally, Argentina’s GDP is now forecast to grow by 5-6% next year, supported by increased investment, consumption, and monetary stability.

“It is no miracle,” Milei said, but merely “governing with macroeconomic prudence.”

Financial markets responded positively to the chainsaw therapy. The stock market has surged by approximately 125% this year, and the Global X MSCI Argentina ETF, a popular option for traders bypassing Argentina's restrictive capital controls, saw its assets grow sevenfold from $104 million when Milei took office to $750 million. Bonds also rebounded, with Argentina’s country risk decreasing by 10.4% as measured by the spread between U.S. and Argentine government bonds.

Javier Milei has set Argentina on an uncharted path. Early results, like slowing inflation and growing investor confidence, are promising, but with limited seats in Congress, Milei must rely on alliances to push his agenda and legal disputes with international creditors, potentially costing $31 billion, could complicate his plans. The coming years will determine whether Javier Milei’s economic recipe can truly bring lasting change for Argentina and inspire other nations.