Credit for the swift economic recovery goes to President Javier Milei’s adherence to classical-liberal principles.
This summer, the picturesque streets of the beachside resort Punta del Este in Uruguay drew unprecedented levels of congestion. Argentines had returned, brimming with fresh wealth and optimism. Last year’s expected recession in Argentina had given way to a much faster-than-anticipated V-shaped recovery in the latter half of 2024.
Credit for the swift economic recovery goes to President Javier Milei’s adherence to classical-liberal principles: Fiscal rebalancing and deregulation laid the groundwork for an economic miracle — the latest example of advancing economic freedoms to drive vast overall prosperity. This transformation followed 15 years of stagnant real capital investment. In fact, by the time the Fernandez administration departed in December 2023, Argentina’s capacity utilization had fallen by over 10 percentage points in a decade to just 64 percent. From this repressed baseline, Milei’s deregulation reopened market opportunities. What quickly followed was a virtuous cycle of surging output, investment, real credit growth, and confidence. Thanks to this recovery, Milei’s popularity soared to over 60 percent in January.
The positive confidence shock that Milei’s reforms have delivered to the domestic Argentine economy and financial markets has further stimulated investment growth in pursuit of fresh profits. Ironically, this is consistent with the views of members of the Cambridge University economics school, of which the most notable member was perhaps John Maynard Keynes (1883–1946). They all concluded the fluctuations in business confidence are the essence of the business cycle. Frederick Lavington (1881–1927), a fellow of Emmanuel College and the most orthodox of the Cambridge economists, went even further in his 1922 book, The Trade Cycle, wherein he concluded that, without a “tendency for confidence to pass into errors of optimism or pessimism,” there would not be a business cycle.
This positive confidence shock is a good thing, but confidence is fleeting. Indeed, storm clouds are gathering on the horizon: Money supply (M3) growth remains excessive at 123 percent per year, and capital controls continue to limit dollar inflows. These developments could not only undercut the sustainability of the business cycle but could also undermine Milei’s plans to lift currency and capital controls.
Such discrepancies cast doubt on the durability of recent lower inflation readings as the economic expansion advances — even in the face of major productivity gains. And despite the dynamic, positive feedback of the recovery, there is little evidence of fresh dollar inflows at this point. Foreign exchange reserves and U.S. dollar deposits in commercial banks have stagnated. Capital controls clearly remain a deterrent and raise the risk of an initial sharp peso depreciation should they be removed. As Milei must realize, any sharp peso depreciation would cause his popularity to plunge because of the boost it would give to inflation and would further represent quite a slip between the cup and the lip. And, to complicate matters even more, there will be critical midterm elections in October.
Despite his promises to do so, Milei has not yet been able to rid Argentina of its maze of capital controls. If he truly wants to achieve and preserve his aims, he should deliver on the pledge he campaigned on: He should mothball the Central Bank of Argentina (BCRA) and the peso, put them in a museum, and officially dollarize. With that, capital controls would be removed, and the U.S. dollar would become the coin of the realm. However, the Milei government has refrained from dollarization — wrongly, in our view. The president has chosen to wait for an International Monetary Fund (IMF) deal before dollarizing and removing capital controls. By delaying, Milei has created his own Achilles’ heel, namely excessive money creation in a fast-growing economy that struggles to attract global investment until capital controls are lifted.
It’s not too late. The immediate dismantling of the BCRA would spur such massive capital inflows into the newly deregulated economy that President Milei’s present economic miracle would seem modest by comparison. Milei’s maverick yet principled approach has yielded reforms the economic establishment considered impossible — and disastrous. He has proven them all wrong. We hope Milei seizes on his record popularity to take another principled step — dollarization — and thereby fully dispersing any storm clouds on the horizon. In doing so, he would set Argentina on a path of sustainable economic expansion, inflation would be rapidly conquered, and Milei’s impressive legacy would be sealed in the record books. Until then, Argentina’s capital controls and the peso will remain his sword of Damocles.
Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore. Guy Petcho is an advisor to Two Sigma’s discretionary macro investment team.