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Milei's reforms: opportunity or risk for Argentina's economy?
Javier Milei's reform agenda in Argentina is showing initial successes, but risks to stability and social justice remain.
Milei's reforms: opportunity or risk for Argentina's economy?
Since taking office as President of Argentina, Javier Milei has introduced a series of economic reforms that are already showing initial success. Positive inflation and poverty data are reportedly surprising, while the resources sector is thriving and manufacturing is in recession. A decrease in inflation was achieved, among other things, by cuts in the public sector and a reduction in the money supply. These measures caused foreign exchange to return and credit availability and corporate bonds to increase, indicating a stabilization of the economy, as IW Cologne reported.
However, Milei's reforms have also been criticized. Cuts in health care and the education system endanger public services. In addition, the termination of the memory policy consensus raises questions about the democratic integrity of his government. The industry in particular is under pressure, with falling values being observed, especially in the third and fourth quarters of 2024. Gross value added in agriculture is only slightly above the average values of the last seven years, while the manufacturing sector is showing only a slow recovery, producing in some areas up to 25% less than in 2017.
Economic challenges and potential
The chemical industry remains at a low level, while vehicle and agricultural machinery construction is benefiting from regional demand. The mining boom is being driven by large increases in gross fixed capital formation, supported by direct investment from the US. Tax breaks under the RIGI program encourage large-scale investments in mining. While the prospect of dollarization could benefit the extractive industries, it could exacerbate the existing industrial crisis.
The competitiveness of the manufacturing sector remains unclear and there is still a need for reform in the labor market and tax policy. Unit labor costs in Argentina are more than twice as high as in Brazil. Milei is also planning a comprehensive tax reform to reduce corporate taxes for 2025. Building new nuclear power plants could entail significant cost risks, while a one-sided focus on the raw materials sector could endanger long-term prosperity. The location conditions for industry must be improved in order to avoid deindustrialization.
Javier Milei's economic policy beliefs are based on the Austrian School of Economics, which was influenced by Ludwig von Mises and Friedrich August von Hayek. The basic patterns of economic policy in Argentina since the 1960s have been characterized by high national and foreign debt, financial repression, inflation, devaluation of the peso as well as customs barriers and capital controls, such as Flossbach from Storch Research Institute explained.