Argentina's "chainsaw reform": the people are a little unbearable, but "this is only the first step"

After announcing 30 emergency economic decrees in one sitting, Argentina's new president, Milley, said solemnly to the camera: "This is just the first step." ”

On the evening of December 20, local time in Argentina, Milley delivered a national radio and television speech, "chainsawing" the existing economic system in Argentina, these economic decrees include stopping government intervention in the operation of private enterprises, abolishing the government's price limit on commodities, and privatizing state-owned enterprises.

Milley often used chainsaws as a prop in his election campaign, claiming to cut Argentina politically and economically. But even if Milley is now in the presidency, he can't wield a chainsaw as much as he wants, and the Argentine Congress can vote to repeal the president's emergency decree.

Sun Yanfeng, deputy director of the Latin American Institute of the China Institute of Contemporary International Relations, told the first financial reporter that Milley's Liberal Forward Party is weak in the Argentine Congress, and if it cannot win the support of the center-right bloc, it is impossible for any reform bill to win the support of Congress, which will contain Milley.

Sparks flew over the "chainsaw reform".

"I am signing an emergency decree that will deregulate the economy in Argentina, and that is urgent. Milley, an economist who was once aggressive on television, now sits in front of the camera, with all the members of the Argentine cabinet behind him.

As the market expected, Milley's reform plan is full of words such as "repeal", "cancel" and "relax". In addition to the above-mentioned policies, the removal of restrictions on real estate rental prices, the abolition of restrictions on foreigners' purchase of land, and the relaxation of a series of regulations and rules in industries such as medical care, tourism, Internet, and retail are also quite conspicuous.

This is Milley's latest move on shock therapy. In his inaugural speech on December 10, he said there was no alternative to the current economic crisis through drastic and painful fiscal reforms. He immediately announced that he would use "shock therapy" to save the Argentine economy, and he predicted that "this will naturally have a negative impact on economic activity, employment, incomes and the number of people living in poverty".

After the completion of the transfer of power, Milley acted immediately on the 10th and signed the first emergency decree to reduce the number of departments in the new Argentine government from 18 to 9. The Ministries of Agriculture, Education and Culture, which are essential in other countries, have disappeared from the Argentine Cabinet, leaving the nine Ministries of the Interior, Defence, Economy, Infrastructure, Justice, Security, Health, Human Capital and Foreign Affairs.

According to some sources, Milley originally wanted to shut down the Ministry of Health, but after the persuasion of his assistants, the Ministry of Health was able to keep it.

On the 12th, Argentina's new Minister of Economy Luis Caputo announced the first batch of economic measures of the Milley government, including the official exchange rate from about 400 Argentine pesos per US dollar to 1 US dollar to 800 pesos, and the peso depreciated by more than 50% in one go.

In his video address, Caputo repeatedly stressed that Argentina "runs out of money" and "needs to address the fiscal deficit." To this end, he also announced that, in order to tighten the budget, Argentina will stop tendering for new public projects and will cancel development contracts that have "not yet begun". "Argentina's infrastructure will be implemented by the private sector, as the state has neither the money nor the source of funding to complete these projects," he explained. ”

The country of Argentina is divided into 24 administrative units, consisting of 23 provinces and the federal capital (the city of Buenos Aires). After a series of "sparks" of new policies, as of the 16th, 11 provinces in Argentina have declared a state of economic emergency, and announced plans to control and reduce public spending. Some provincial governors also said they would find it difficult to pay civil servants' salaries in December due to a lack of funds.

"Shock therapy" is a medical term, which was introduced into the field of economics by the American economist Jeffrey Sachs in the mid-80s of the 20th century. He was an economic adviser to Argentina's neighboring Bolivia, and he succeeded in using "shock therapy" to save the Bolivian economy.

"Shock therapy" is usually the voluntary and abrupt relaxation of price and currency controls by the state, the reduction of state subsidies, and rapid trade liberalization, often accompanied by large-scale privatization of state-controlled public assets.

Reform measures similar to "shock therapy" are not the first in Argentina's history. Aram Aharonian, head of the Latin American Integration Foundation and the Center for Strategic Analysis of Latin America, also said that some of the measures taken by the Milley government are not the first ones, and have been implemented during the term of presidents such as Macri (2015~2019), but without exception ended in disaster, making Argentina a heavily indebted country.

In addition, some scholars say that the Milley government's direct cutting of government departments may lead to chaos in the country's management and economic operations, and eventually eat into Argentina's economy.

The common people can't bear it

Milley expressed satisfaction with the new policy currently being implemented. He said that after the sharp reduction in the exchange rate, the gap between the official exchange rate of the dollar and the black market exchange rate of the peso has narrowed. However, after the announcement of the new policy, the peso exchange rate in Argentina's private black market fell sharply to the level of 1080 pesos per US dollar, and prices rose rapidly in various places, with goods rising by 100% in some areas.

The depreciation of the currency is accompanied by a reduction in government subsidies for the transport and energy sectors, which will have a huge impact on most Argentines. At the same time, the Milley government is also mulling major reforms in the labour market, including measures such as reducing corporate social security contributions, extending probationary periods, and reducing dismissal compensation, which will clearly benefit companies and inevitably affect the interests of ordinary people who are employed.

So on the 20th, the day Milley announced a new round of "shock therapy" measures, left-wing groups held their first protests in Plaza de Mayo in downtown Buenos Aires, demanding more financial support for the poor, and protesting against the government's $20 billion cut in public spending and the "criminalization" of the demonstrations.

Previously, the Milley government had warned the demonstrators on the 18th that anyone who blocked the road during the demonstration would cancel his social assistance. Left-wing MPs have opted for legal action, asking the court to declare the Milley government's new rules against the demonstrations unconstitutional.

The Institute of International Finance predicts that the Argentine economy will shrink by 1.3% in 2024. Martin Castellano, head of Latin American research at the agency, said: "A recession is inevitable next year and we think it will be a painful year. ”

According to a report released by Argentina's Central Bank in November, inflation is expected to reach 185% in 2023. It was the people's frustration with reality that prompted 56% of Argentines to vote for Millet.

When the economic "shock" really comes, will the voters who voted for Milley still support his plan? Monica de Bohly, a senior fellow at the Peterson Institute for International Economics in the United States, said that real improvement will take time, and once Argentines find that their pockets are empty and nothing has changed, they will lose patience and support for Milley may disappear.

Despite public complaints, the International Monetary Fund (IMF) praised the Milley government's "bold initial moves." IMF spokeswoman Julie Kozack said in a statement: "The new government's decisive policies will help stabilize the Argentine economy and lay the foundation for more sustainable and private-sector-led growth." ”

Although there is a high probability that Milley's reforms will fail, there is now hope that Milley will work a miracle during his four-year tenure and lead the Argentine economy to a rebirth and out of the predicament after a short period of pain.