[Global Focus] 'Milley Magic' That Even Musk Admired... Can Argentina Escape Poverty?

President Milei's 1st Year in Office in Argentina
Government Spending Cut Like a 'Chainsaw' Amazes Musk
Harsh Measures Also Cause Side Effects Like Rising Poverty and Unemployment Rates

Last December, Argentine President Javier Milei, who had announced a sweeping 'fiscal diet' wielding a chainsaw, received his one-year performance report in office. Contrary to concerns, inflation eased to about one-tenth of its previous level, and the stock market soared. With civil servant cuts and spending reductions reminiscent of the preview for the newly established U.S. Department of Government Efficiency (DOGE), Argentina achieved its first monthly fiscal surplus in 12 years. However, the subdued domestic demand due to excessive belt-tightening and persistently high poverty rates remain challenges to be addressed. Can President Milei's 'chainsaw reform' continue on the path to success?

'South America's Trump' Milei's 'Chainsaw Reform'

On the 10th (local time), marking President Milei's first anniversary in office, his policy line has been consistent since his campaign. He pointed out Argentina's chronic fiscal deficit and the vicious cycle where liquidity supplied to cover it causes soaring inflation, announcing massive government spending cuts. Despite extreme pledges such as 'abolishing the central bank' and 'adopting the U.S. dollar as legal tender,' over 55% of voters supported President Milei.

Opening his inaugural speech by blaming previous Peronist (left-wing populism following former Argentine President Juan Per?n) administrations for leaving the country in debt, President Milei demonstrated his reform resolve by signing a bill on his first day in office to halve the existing 18 government ministries. Departments that had grown excessively powerful under past progressive governments, such as the Ministry of Environment, Ministry of Women's Rights, Ministry of Social Development, and Ministry of Public Works, were consolidated. The list of civil servants to be cut reached 70,000.

True to his reputation as 'South America's Trump,' who has expressed climate crisis skepticism, President Milei significantly relaxed environmental regulations related to forest and glacier protection. Even Elon Musk, Tesla CEO who will lead the U.S. Department of Government Efficiency (DOGE) under the Donald Trump administration, called it an "impressive step forward." Vivek Ramaswamy also emphasized, "The U.S. needs spending cuts in Milei's style, but stronger (on steroids)."

"Turn off the leaking faucet"

President Milei's 'chainsaw cuts' did not stop there. The peso's purchasing power had plummeted to rock bottom, and the depleted foreign exchange reserves remained a problem. Argentina had maintained a fixed exchange rate system to defend its currency after reckless money printing caused a collapse in its value. However, the government's official exchange rate, nearly three times the market value, was thoroughly ignored, and most foreign exchange transactions took place in the black market.

Accordingly, President Milei adjusted the fixed exchange rate from 366.5 pesos per dollar to 800 pesos shortly after taking office, effectively devaluing the peso by over 50%. The logic was that a lower currency value (higher exchange rate) would improve exports and thus replenish foreign reserves. He also announced a policy to devalue the peso by 2% monthly as part of a crawling peg system (gradually adjusting the official exchange rate within a small range). Although the peso's depreciation would fuel inflation and increase hardship for ordinary citizens, he judged this painful sacrifice necessary for the future. The International Monetary Fund (IMF) praised it as a "bold initiative."

Thanks to these policies, the gap between Argentina's official exchange rate and the unofficial dollar (blue dollar) rate prevalent in the black market narrowed rapidly. The strategy of Luis Caputo, Minister of Economy and the economic chief of the Milei administration, also shone. He offered tax incentives to encourage Argentines to deposit dollars hidden at home or in overseas accounts into domestic banks, raising $15 billion (about 21 trillion won). As a result, foreign currency demand in the black market decreased, and pressure on the exchange rate eased, according to foreign media.

'MAGA' Making Argentina Great Again

Argentina, suffering from a murderous inflation rate of 130-140% annually and a poverty rate approaching 40%, quickly stabilized with President Milei's rise. The month-over-month inflation rate, which was 26% last December when Milei took office, dropped to 2.4% last month?the lowest since July 2020. After painful austerity, the Argentine government achieved its first monthly fiscal surplus in 12 years in January, and the price of long-term government bonds, considered distressed assets, tripled. The MerVal index, Argentina's main stock index, also surged nearly 140% this year.

Major foreign media reported, "'Mr. Market' Milei has achieved feats defying gravity," adding, "His followers wear 'MAGA' (Make Argentina Great Again) hats." Jos? Bosch, a lawyer living in Buenos Aires, said, "The country was in a difficult decline, but now we are on the right path," and "Prices have begun to stabilize, and lost wages are recovering to previous levels." Facundo G?mez Minuj?n, head of JP Morgan's Argentina branch, emphasized, "The company called Argentina is emerging from 'Chapter 11' (U.S. bankruptcy protection) in less than a year. It couldn't be better."

Side Effects of the 'Strong Medicine'

Having experienced nine defaults, Argentina's 'strong medicine' to improve its economic structure brought significant side effects. Freezing pensions and civil servant salaries and cutting various energy and transportation subsidies sharply reduced disposable income, leading to consumption contraction. According to local consumer consulting firm Scentia, sales of basic necessities such as food and hygiene/cleaning products fell about 20% year-on-year last October. Even beef consumption, a staple for Argentines, hit its lowest level in 30 years.

Life became tougher. According to Argentina's National Institute of Statistics and Census (INDEC) in September, the poverty rate in the first half of this year was 52.9%, up more than 11 percentage points from 41.7% in the second half of last year. The Guardian reported this as the worst in 20 years, with about 3.4 million people falling into poverty this year alone. The unemployment rate in the second quarter rose to 7.6%, up 1.4 percentage points year-on-year, and the economic growth rate, which was -1.6% last year, is projected to decline further to -3.7% this year.

Alfredo Serrano Mansilla, head of the progressive Latin American Geopolitics Center (CELAG), likened the economic improvements since President Milei took office to a 'dead cat bounce' (a temporary rebound after a sharp stock price drop), predicting the positive mood will not last long. He said, "Milei has not solved Argentina's microeconomic structural problems," and criticized, "(Milei's policies) are a model with a very short shelf life."

The Trend is 'Small Government'

Despite the clear pros and cons of his policies, President Milei still maintains a high approval rating in the 50% range. There is also analysis that the current pain is seen as a transitional phase for the future. Major foreign media diagnosed, "If Milei succeeds in the long term, Argentina's political landscape, which has experienced 'big government' for years, will change," adding, "He could gain more seats in next year's midterm elections and strengthen reform momentum."

Considering President Milei's pro-U.S. stance, he is expected to actively coordinate with the Trump administration, which will take office in January next year. On the 14th of last month, President Milei flew to Mar-a-Lago, Florida, to showcase a 'bromance' with President-elect Trump. He is the first head of state to meet Trump since the election. Local media speculate this is a strategic move to gain fiscal benefits by closely aligning with the U.S., which wields significant influence over the IMF. Argentina is currently repaying principal and interest monthly on a $44 billion (about 63 trillion won) IMF bailout.

AFP Yonhap News