Argentina replaces Zimbabwe as the world's most miserable country.
Each year I produce Hanke’s Annual Misery Index (HAMI). By using readily available economic data, I can measure the temperature of the patient, so to speak, to determine just how “miserable” or “healthy” an economy is.
The idea of a misery index was fathered by Arthur Okun, a distinguished economist who served as chairman of the Council of Economic Advisers from 1968 to 1969 during President Johnson’s administration. Johnson wanted an easy way to take the economy’s temperature. Okun’s index, which he used for the United States, is equal to the sum of the inflation and unemployment rates.
Okun’s misery index was modified by Harvard professor Robert Barro in 1996, by including the 30-year government bond yield and the difference between the long-term-trend rate of real GDP growth and the actual rate of real GDP growth. Barro used his index to measure the state of the economy during a U.S. president’s term.
In 2009, I amended Barro’s version of the misery index by replacing the 30-year government-bond yield with lending rates, and by replacing the difference between the long-term-trend rate of real GDP growth and the actual rate of real GDP growth with the growth rate of real GDP per capita.
Then, in 2022, I made a further amendment to HAMI. Following Andrew Oswald’s suggestion, I decided to double the weight put on the unemployment-rate component in HAMI. So, HAMI is the sum of the year-end unemployment (multiplied by two), inflation, and bank-lending rates, minus the annual percentage change in real GDP per capita. Unlike Okun and Barro, who focused on the United States, HAMI covers many foreign countries; 157 are included in the 2023 edition.
The 20 countries that are most miserable in 2023 are roughly the same rogue’s gallery as in 2022. Indeed, 16 of the 20 most miserable countries are the same, with Cuba, Sri Lanka, Ghana, and Rwanda departing and Pakistan, Malawi, Myanmar, and Egypt joining. At the happy end of the HAMI distribution, 13 of the 20 least miserable countries remained the same in 2022 and 2023, with Ireland, Kuwait, Niger, Vietnam, Israel, the United Arab Emirates, and Norway departing and Fiji, Bahrain, Denmark, Hong Kong, Germany, Mali, and Belgium joining.
This brings me to 2023’s most miserable country. Argentina has replaced Zimbabwe as the world’s most miserable country.
Argentina’s HAMI = [(Unemployment (6.5%) * 2) + Inflation (211.4%) + Bank‐Lending Rate (95.9%)] − Real GDP Growth (-1.5%) = 321.8
It’s not surprising that Javier Milei surprised Sergio Massa, the former minister of economy, to win the presidential election last November. After all, Milei campaigned on a platform of mothballing the central bank (BCRA), putting it in a museum, and replacing the pathetic peso with the U.S. dollar. This, Milei promised, would smash inflation and stabilize the economy, setting the stage for much-needed free-market reforms.
The Argentine public bought Milei’s message and put him in the Casa Rosada. And why not? After all, inflation and the associated bank lending rate make up 95.5 percent of Argentina’s 2023 HAMI. Moreover, Argentines know that Ecuador, El Salvador, and Panama are dollarized and their inflation rates at the end of 2023 were among the lowest in the world, at 1.3 percent, 2.2 percent, and 1.9 percent, respectively. In short, dollarization is a proven inflation-killer, and the low inflation rates in the “dollarizers” make them much more happy than the most miserable country in the world, Argentina.
But, once elected, Milei changed course. He appointed Luis Caputo as his minister of economy. Caputo had briefly served as the minister of finance and president of the BCRA in the government of President Mauricio Macri, where he helped engineer what was the start of Argentina’s current crisis. With that, Milei has mysteriously shelved dollarization. Instead, Milei and Caputo have embraced what appears to be a standard IMF austerity program. It began with a 50 percent devaluation of the peso, which contributed to a surge in annual inflation to 276 percent (up from 254 percent in January and 211 percent in December) in February. Instead of crushing inflation with dollarization, Milei has delivered a classic devaluation-inflation tax.
Milei has been poorly advised. Dollarization is both desirable and feasible. Dollarization should have been the first policy that Milei implemented. That would have smashed inflation immediately, given Milei a big credibility boost, and made it easier for him to implement the rest of his agenda.
When implementing economic policies, there is nothing more important than their proper sequencing. Just consider President Carlos Menem’s experience in Argentina. He was first elected in July 1989, the very month that hyperinflation peaked at 199 percent per month. Menem had many good ideas. But he failed to crush inflation immediately and, as a result, he was going nowhere. Then, in February 1991, Menem switched Domingo Cavallo from being minister of foreign affairs to minister of economy, and in April 1991, the peso was linked to the dollar in a currency reform called Convertibility. Inflation was crushed, a confidence shock was realized, reforms started to move forward, the stables started to be cleaned, and the economy boomed.
There are important lessons to be learned from President Menem’s experiences. In Argentina, you must start with a big bang to establish confidence and stabilize the economy. After all, stability might not be everything, but everything is nothing without stability.
Without dollarization, Argentina is destined to remain miserable.
Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore, Md., and a senior fellow at the Independent Institute in Oakland, Calif. In Argentina, he advised President Carlos Menem from 1989 to 1999 and minister of economy Domingo Cavallo from 1995 to 1996. Hanke also served as President of Toronto Trust Argentina in Buenos Aires when it was the world’s best-performing emerging market mutual fund in 1995.