Is Milei rewriting economic theory?

When Argentina was mentioned just a year ago, economists
immediately thought of three things: skyrocketing inflation, the devaluation of
the Argentine peso, and government default.

These issues became defining features of the Peronist and,
later, Kirchnerist governments. However, as history has shown, trying to combat
inflation by increasing public spending doesn’t work in practice and pushes the
population to seek refuge
in XAUUSD or BTC.

The same can be said of price controls, rent controls,
multiple exchange rates, and capital controls.

All of these only worsened the situation so much that
Argentina became the only country in modern economic history to go from being a
wealthy nation to the category of middle-income countries.

Public discontent led to the election of far-right
libertarian candidate Javier Milei, who promised change with his
“chainsaw” policies. It’s been over a year since he took office, and
the effects are already evident.

Despite some criticism, the budget deficit has been reduced
to zero for the first time in 100 years, and inflation, which was at 25% per
month in December 2023, has dropped to 2.7% per month.

This has allowed the Central Bank of Argentina to
significantly lower its key interest rate, from 126% when Milei took office to
a more manageable 35% by November. This is crucial for the economy’s
development.

Lower rates will ease the burden on the population and
companies with existing debt and make credit more accessible for development
and consumption, both of which are crucial for GDP growth.

Not for nothing has the Merval index risen more than 175% in
the past year, outpacing the
S&P 500, Nasdaq, and other emerging market indices. The country’s CDS
price has also dropped to a four-year low.

However, these gains have come at a cost: in his first 10
months, Milei cut public spending by 31%, laid off thousands of public
employees, and closed half of the ministries, triggering protests.

The cuts in government spending sped up the decline in GDP.
In the first quarter of 2024, GDP shrank by 5.1%, following a 1.2% drop in the
last quarter of 2023. For all of 2024, GDP is expected to shrink by 4%.

Yet, Milei recently proudly announced that Argentina
has exited the recession, growing 3.9% in the third quarter, the first
growth since the end of 2023. For next year, GDP is expected to grow by 5-6%.

Overall, if Javier Milei’s economic measures continue to
improve the country’s outlook, this could attract more investment, further
accelerating the recovery from previous policies.

This article was written by FL Contributors at www.forexlive.com.