With Argentina facing dire economic challenges, Dr Steven Hail offers recommendations for recovery based on lessons learnt from Australia's own fiscal mistakes.
TEN YEARS AGO, frustrated with economic policy debates in Australia and many other countries, I gave a public talk entitled ‘Exposing the Myth of a Commonwealth Budget Emergency’. It used insights from modern monetary theory (MMT) to attack not only the recent budget of the Abbott/Hockey Administration but also the (broken and badly misinformed) promise of a budget surplus that both Kevin Rudd and Julia Gillard had made in earlier years.
Since then, I have been campaigning for the wider use of an MMT frame for thinking about public policy, and the culmination of this will be touring with an award-winning documentary entitled Finding the Money and renowned MMT economist Stephanie Kelton next month.
I said that Australia’s government is a full monetary sovereign. This means it issues the currency in which our tax liabilities are denominated; that currency is not convertible at a fixed rate into gold or U.S. dollars or anything else and it has no significant foreign-currency-denominated debt. That means the only constraints on its spending relate to our productive capacity. Whatever we can do, it can pay for. There is inflation risk relating to federal spending but no insolvency risk.
I also pointed out that government surpluses are non-government deficits, so in the absence of a persistent trade surplus (which we have now but didn’t have then), any government surplus must either force the private sector into more debt (as under Howard/Costello) or drive the economy into recession (think Hawke/Keating).
We should not be aiming to run a fiscal surplus – or seeing it as a great achievement if we happen to do so – as that is not a guide to a responsible fiscal policy. In the absence of supply shocks, a responsible fiscal policy is aimed at non-inflationary full employment. The budget will normally be in deficit because the private sector usually needs to run a surplus, but no specific budget outcome should be seen out of context as an appropriate target.
The price of getting this wrong under all the above administrations, and then under Turnbull and Morrison, was unnecessary unemployment and insecure employment, under-funded public services and missed opportunities.
Way back in 2014, one of the questions I got was, “What about Argentina?” With a few seconds to respond at the time, I said it was hard enough talking about Australia and had to avoid the question. But what about Argentina? What about Turkey or Sri Lanka? What about Zimbabwe in 2008, or so many other cases of financial crises?
If you want a general answer, it is that these countries are not full monetary sovereigns. But looking for a general one-size-fits-all answer might be a mistake — one that International Monetary Fund (IMF)/World Bank economists have made down the years at great cost. Every country has its own economic and political history, social institutions, endowments and vulnerabilities.
In the case of Argentina, it has experienced a return to hyperinflation since 2022 – the seeds for which were sown in 2016 – and last October elected a president with more extreme economic shock policy proposals than any in recent Latin American history. President Javier Milei has passed a law marking the stripping away of workers’ rights, further privatisations, eliminating remaining controls on foreign investment and is proud to oppose social justice.
Milei apparently intends to scrap Argentina’s currency and adopt the U.S. dollar as Argentina’s legal tender currency. Such dollarisation already exists in Ecuador and El Salvador, but not in such a large economy as Argentina or one for whom the U.S. is far from its largest trading partner. It is a policy widely regarded as suicidal but may be impracticable anyway, as it requires the government to buy up pesos in circulation with U.S. dollars — and Argentina has hardly any official reserves of U.S. dollars to accomplish this.
There is a chance that Milei might have some short-term success, barring a revolution, if he doesn’t dollarise, if foreign investors can be tempted to buy cheap Argentine assets and that props up the peso for a while. But it will end in tears sooner or later.
Argentina has had hyperinflation before, in the late 1980s, after the fall of its military regime. Back then, in the early '90s, they tried “convertibility” against the U.S. dollar under what is called a currency board system.
The issuance of pesos was limited to central bank reserves of U.S. dollars for the sake of credibility. People started to think of the peso and the dollar as the same thing. It brought inflation down, but at the expense of austerity, rising inequality and eventually an over-valued currency which made it impossible to compete against Brazilian firms and others.
There was a banking collapse and mass unemployment, more or less a revolution in 2001, leading to regime change, a floating (and initially heavily depreciated) peso, a default on foreign debt, a job guarantee scheme and a complete change in direction.
From 2002 (at least until 2008), the Argentine economy was the best-performing economy in the Western hemisphere. You might like to read that last sentence again. High export prices helped, especially after 2005, but were not the whole story. The exchange rate was floating but fairly stable. Inflation was low by Argentine standards. From 2002-11, the economy virtually doubled in size.
By 2011, with a weak peso and strong dollar, inflation was back above 25 per cent, and external conditions were getting tougher. Argentine residents looking to switch pesos into dollars put further downward pressure on the peso, and there was the danger of a depreciation-inflation spiral, so the Government moved back towards fixed exchange rates and introduced more controls on the movement of funds into and out of the country.
From 2011 to 2021 were years of stagflation, made worse by the election of the Right-wing Macri Government, which, as in the '90s and 2024, pivoted towards neoliberalism, deregulation and fiscal austerity, but this time moving towards a floating exchange rate and central bank inflation targets.
Of course, it didn’t work. Initially, hot money came in and held the peso up, but by 2018 it was flooding back out again. The peso was in free fall and the Macri Government was reduced to borrowing more U.S. dollars to support the currency while being unable to hit its fiscal or inflation targets.
A centrist government returned in 2019, began to reverse some of Macri’s policies and negotiated yet another IMF loan package in 2022. But the consequences of Macri’s policies, the impact of the pandemic, European war and climate change, the lack of trust of the population in the country’s political and economic institutions, and an ongoing social conflict between labour and capital over income distribution turned inflation into hyperinflation once more.
Then in comes Macri.
What does it mean to say Argentina is not a monetary sovereign? Even while it retains the peso, there are excessive foreign-currency-denominated debts, in both government and private-sector institutions. Given the structure of the economy, peso depreciation feeds domestic inflation, which feeds further depreciation. More foreign debt to resist this adds to the threat of insolvency. A lack of trust encourages capital flight from the peso to the dollar.
It might take another crisis like 2001 to change things for a while, but in the longer term, Argentina needs to diversify its industrial base. It needs to produce more value-added goods and services, reduce dependence on extraction and agricultural exports, and offer savers attractive peso-denominated financial products. Political leaders need to use the power of the government as a price setter to stop the widespread indexation, which means external shocks have such devastating effects on the Argentine economy.
When all these things are in place, Argentina could attain the high degree of monetary sovereignty that Australia already enjoys and the logic of my 2014 talk will apply to them, too.
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