Nobel Prize-winning economist Simon Kuznets is often cited, perhaps apocryphally, as having said that there are four types of countries: developed, underdeveloped, Japan, and Argentina. Japan, an island lacking natural resources and defeated in war, had every reason to be underdeveloped. Argentina, by contrast, was blessed with natural resources, plenty of fertile land, and no destructive wars. Yet Japan thrives, and Argentina remains essentially stagnant for almost five decades.
With the election of Javier Milei at the end of 2023, everything has changed, or so we are told by the conservative commentariat. Niall Ferguson has celebrated Milei’s miraculous abilities, and that doesn’t mean the power to communicate with his dead dog, Conan. Ferguson praised the popularity of Milei’s libertarian fundamentalism, not so much because it is working (though he does believe that), but because it is popular.
The system seems designed to make instability profitable, generating recurrent cycles of indebtedness and default.
The conventional wisdom is that Argentina was once a developed country, but the excessive profligacy of populist Peronist presidents caused ruin. Milei has suggested that his electoral victories, in 2023 and the recent one in the midterms last October, signal the end of populism, in particular the Peronist group around ex-president Cristina Fernández de Kirchner, and the beginning of a new and renewed process of growth that would make Argentina great again. Milei’s victories have been celebrated on the right, at Davos and other venues for the global elite, including in the United States, where President Trump has committed the country to support Milei’s economic policies in unprecedented ways, pledging at least $20 billion.
The truth is there is hardly anything new about Milei’s policies. They have been applied in Argentina at least three times before—during the last dictatorship in the 1970s, surprisingly during the Peronist administration of Carlos Menem (1989–1999) that Milei actually takes as an inspiration for his own presidency, and more recently under the presidency of Mauricio Macri (2015–2019), a key Milei ally. These policies failed consistently. Even the short-run success of Milei should not shock anyone, since that also happened before, when Menem was re-elected after promoting an essentially identical program, only to become very unpopular within months and end up in disgrace.
Donald Trump thinks he deserves a Nobel Peace Prize; Milei is in pursuit of the economics prize. It is unlikely that he will revolutionize economic science, but even the more modest goal of stabilizing the Argentine economy and restoring the path to prosperity will be more elusive than he and his sycophants imagine. At the end of the day, Milei’s policies are unsustainable and will lead to economic collapse.
The IMF or Populism?
If we are to believe the official narrative, the recent turmoil was triggered by political uncertainty following electoral setbacks for Milei’s government in mid-September. In Buenos Aires province, Peronism regained ground after Gov. Axel Kicillof, a former finance minister under Kirchner, rescheduled provincial elections to decouple them from national contests. The maneuver, legally permitted, was intended to strengthen local Peronist performance and limit Milei’s influence. These electoral losses shook investor confidence and provoked fears of a Peronist resurgence.
Following the September elections, the United States intervened to stabilize the situation. Treasury Secretary Scott Bessent pledged $20 billion from an obscure currency management facility called the Exchange Stabilization Fund, supplemented by an expected $20 billion in loans organized through major Wall Street banks. (The bank loan fell apart last week; that facility will likely be about $5 billion.) This assistance came on top of a $20 billion program with the International Monetary Fund (IMF) agreed earlier in April, of which Argentina already received $14 billion.
Supporters of the government argue that these measures confirmed Washington’s confidence in Milei’s program and helped avert a deeper financial crisis, and perhaps had a positive effect on the national midterm election, when Milei’s party, La Libertad Avanza (Freedom Advances), won a significant victory with approximately 41 percent of the vote over Peronists, who took roughly 35 percent of the electorate.
However, a closer look at exchange rate dynamics reveals a different story. Volatility in the peso began well before the Buenos Aires elections, specifically in April, when Milei signed the new agreement with the IMF that required Argentina to dismantle capital controls. Argentina also adopted a slowly adjusting exchange rate band, an arrangement that Milei’s economic team implemented as a compromise with the IMF, which wanted a free float. The IMF agreement, and not left-wing populism, immediately fueled speculation about the central bank’s ability to defend the currency in the absence of adequate reserves. With interest rates lagging behind expected depreciation, holding peso-denominated assets became unattractive, and dollar demand surged.
By midyear, the exchange rate, initially around 1,000 pesos per dollar, had climbed to the upper limit of the band, around 1,400 pesos per dollar, where it has largely remained. This depreciation undermined the government’s claims of macroeconomic stabilization. The earlier decline in inflation owed less to fiscal adjustment than to a tightly managed exchange rate following the massive devaluation that accompanied Milei’s inauguration in late 2023. Once capital controls were loosened, the peso quickly came under pressure again, revealing the fragility of the stabilization effort.
By that point, the Milei administration had already achieved a significant, though painful, reduction in annual inflation, from over 200 percent to around 30 percent: more reasonable, if still high. The stabilization was achieved by allowing a slower pace of depreciation of the exchange rate, after the initial depreciation Milei imposed in late 2023, which caused an acceleration of inflation. Moderating exchange rate depreciation allowed for costs of imported goods to increase at a lower rate and helped stabilize the economy. There is no stabilization of very high inflation without a stable exchange rate. Significant cuts in spending and the decline in output and employment in 2024 also contributed by moderating wage demands from workers, another important element of the stabilization strategy.
Stagnation is certainly not all Milei’s fault; Argentina’s economy has been stagnant since 2011. But fiscal tightening imposed under Milei further deepened unemployment and poverty. Despite the social costs of austerity, the decline in inflation temporarily boosted Milei’s popularity, reinforcing the enduring appeal of price stability in Argentine political culture, even when achieved through severe fiscal adjustment and economic contraction.
Yet despite the short-term positive political effects of stabilization, the structural problems have not been resolved and can only get worse. The fiscal austerity and foreign exchange liberalization measures imposed under the IMF program have deepened recessionary pressures, while eroding the very exchange rate stability that temporarily restrained inflation.
Milei has been lucky, so far. After a few years of severe droughts that harmed agricultural exports, soybean exports boomed in 2024. Combined with lower imports due to the recession, that led to a current account surplus. In addition, the Trump administration not only provided a currency swap that gave direct access to dollars, but it also transferred to Argentina Special Drawing Rights (SDRs), the IMF’s reserve asset, in another unprecedented move to help a failing political ally. If that wasn’t enough, the trade war with China has diverted significant demand away from American farmers, favoring South American producers, including in Argentina.
However, all of that does not guarantee that Argentina can meet all the short-term payments on its foreign obligations in the next couple of years, let alone pay its current debt. A default, or at least a rescheduling of the current obligations, might be inevitable.
Rich and Broke?
To understand Argentina’s recurring crises, it’s essential to grasp two fundamental points. First, Argentina was never truly a developed country, at least not in the sense implied by Milei. It is true that in the early 20th century, Argentina’s per capita income rivaled that of France or Germany and was not far behind the United States. Argentines are very proud of that, and refer to the early subway system in Buenos Aires as an example of how the country was ahead of the rest of Latin America. Milei’s call for a return to greatness has revived Argentine elitism, well represented in the old joke that an Argentine is an Italian who wishes to be British and doesn’t know how to speak Spanish properly.
But that prosperity rested on a narrow base. Argentina lacked the industrial and technological complexity of the true leaders of the global economy. Germany, France, and the U.S. were producing automobiles, aircraft, chemicals, pharmaceuticals, and other sophisticated manufacturing goods. Argentina primarily exported agricultural (or mineral) commodities, like beef and cereal grains, as it still does, to the industrial center. Wealth was distributed very unequally. If Venezuela is a petrostate, Argentina was a beef state.
That does not mean Argentina made no progress. It did face balance-of-payments problems after the U.S. imposed sanctions during the Peronist era in the 1940s and 1950s, leading to one of its periodic external crises. Yet during the postwar boom, the so-called Golden Age of Capitalism, industrialization raised incomes and delivered momentous achievements. The country produced three Nobel Prize winners in the sciences, and developed capabilities that allowed it to build nuclear reactors and geostationary satellites. Further, during the Peronist era, workers’ rights were recognized, and wages were relatively higher than in the rest of the region. These were not minor accomplishments for a developing nation.
Still, Argentina remained trapped by two structural constraints. First, it depended heavily on imports of capital and intermediate goods, essential for production but only obtainable with dollars. It is worth remembering that there was no Marshall Plan for the developing world. Second, reliance on exporting primary commodities left the country vulnerable to swings in global commodity prices.
After the 1970s, when the United States opened to China and manufacturing began shifting to Asia, global production chains were transformed. Latin America, and Argentina with it, entered a new phase marked by renewed demand for commodity production and rising needs of foreign debt to maintain economic growth. The strong unions and high wages that led to higher patterns of consumption and required significant imports were incompatible with external equilibrium. Distributive conflict was resolved by a military coup, which reduced wages and was an early adopter of neoliberal policies, even before Ronald Reagan and Margaret Thatcher’s conservative revolution and the building of the Washington Consensus. The results were predictable: cycles of borrowing and crisis.
At the end of the day, Milei’s policies are unsustainable and will lead to economic collapse.
Argentina, which defaulted in the 19th century twice, defaulted again in the 1980s during the Latin American debt crisis, triggered by oil shocks and the tightening of U.S. monetary policy. This was resolved through the Brady Plan of the early 1990s, which restructured Latin American debts and promised renewed growth. By then, neoliberalism was ascendant, the Soviet Union had collapsed, and faith in free markets was at its peak. Argentina adopted orthodox reforms: privatizations, deregulation, and a currency peg that stabilized inflation, so successfully that by the late 1990s deflation was the issue.
But beneath the surface, the same weaknesses remained. Exports, now dominated by soybeans, were insufficient to cover both the growing foreign debt and the imports of machinery and intermediate goods needed for production. Current account deficits, exacerbated by trade liberalization and increased imports, caused deindustrialization and ballooning unemployment. By the end of 2001, the system imploded. Argentina devalued, experienced a massive currency collapse, and defaulted again in 2002.
Out of that crisis came the Kirchner era. When Néstor Kirchner took office in 2003, Argentina benefited from China’s commodity-driven boom. Exports boomed. He, and later Cristina Kirchner, negotiated with creditors and sharply reduced the debt burden, restoring a measure of sustainability. I should note that I worked for the Argentine central bank during Cristina Kirchner’s second mandate.
My policy advice notwithstanding, Argentina’s troubles didn’t end there. Hedge funds, led by Paul Singer’s Elliott Management, had bought defaulted Argentine bonds for pennies on the dollar and sued for full repayment. When Macri took office in 2015, his government settled with the “vulture funds” at enormous cost and reopened Argentina’s access to credit markets. Within just a few years, external debt ballooned again, doubling its level in less than four years. By 2018, reserves were falling, and Argentina was back at the IMF’s door.
Today’s crisis is best seen as a continuation of that crisis, made worse by the pandemic and a long period of stagnation. But the crisis is not simply about one country’s mismanagement. It is about how global finance is organized, and who benefits from a system that seems designed to make instability profitable, generating recurrent cycles of indebtedness and default.
Breaking the Cycle
Since the 1970s, Argentina has gone through three waves of borrowing and collapse. These cycles are symptoms of a global financial architecture that rewards short-term speculative capital inflows and punishes developing countries when conditions tighten. It provides an umbrella when it is sunny, and takes it away when it starts to rain. Argentina’s own elites, along with international rentiers, have also profited from this instability. Vulture funds make money on distressed debt and local elites safeguard their assets abroad. Indeed, the wealth that Argentine elites hold offshore exceeds the country’s total foreign debt.
Contrary to common belief, countries that default do not walk away from global finance. They always return, because they need access to imports and investment. Complete autarky is not an option. Argentina remains, paradoxically, a “good payer.” Over time, it repays more, through interest and restructuring, than it originally borrowed.
Sustainable stabilization for Argentina will require a steady nominal exchange rate to anchor prices, combined with selective expansionary policies to revive growth and employment without putting extra pressure on external obligations. In the long run, that can only be done by increasing and diversifying exports, the only consistent way of obtaining dollars to avoid excessive volatility of the exchange rate.
Large depreciations of currency have caused both the rampant inflation of the past and the redistribution of income toward exporters, since devaluations increase their revenue. Increasing the costs of necessary imported goods reduces the purchasing power of consumers. Argentina must reduce dependence on imported capital goods and renegotiate unsustainable debts. Only then, with external accounts in order, would the country have a basis for a steady recovery, one that increases the income of those at the bottom.
That cannot be achieved in the short run without reintroducing the capital controls that the Milei government eliminated, partly forced by the IMF, but also in accordance with their more fundamentalist convictions. Without capital controls, the exchange rate will be vulnerable, and the money that the IMF and the U.S. government provided will be spent trying to maintain its stability, rather than being used to accumulate reserves.
But beyond capital controls, the international financial system itself needs reform. Without a framework that offers stability and fair access to finance for developing countries, Argentina and others like it will remain trapped in the same never-ending cycle of boom, bust, and default.
It is unlikely that the Trump administration, which in many ways has abdicated from a global leadership role, will provide the kind of guidance necessary to regulate global financial markets. Trump’s economic team is dominated by Wall Street interests and hedge fund managers, including Scott Bessent, formerly a leading member of Soros Fund Management, which famously speculated against the British pound in 1992. In fact, Bessent is defending the Argentine swap on the basis of the profits that the U.S. government has made so far from the deal. Of course, those can be easily reversed with a relatively small decline of the peso.
It is also unlikely that we will move quickly to a world in which alternatives to the dollar will limit the need to accumulate U.S. currency, and that provides alternative sources of finance for developing countries under more benign conditions than those imposed by the IMF. The dreams of Brazilian president Luiz Inácio Lula da Silva about a de-dollarized world will not materialize anytime soon. However, it is possible to imagine alternative mechanisms that would reduce the burdens of external debt on countries like Argentina. And the recent actions of the U.S. might surprisingly provide a guide for what to do.
The fact that Argentina’s SDRs recently increased by some $870 million, while U.S. holdings fell by a comparable amount, suggests that the Trump administration used this unconventional mechanism to provide resources to Milei’s government. Progressive groups have demanded expansion of SDR allocations for years, but seldom noted that when those resources are expanded, as they were during the pandemic, most are received by countries that are not experiencing a crisis. Creating mechanisms for sharing these resources in times of crises should be a priority for IMF reform and the reorganization of the international monetary system.
Maybe these funds could play a role when Argentina’s next default takes place, which might not be too distant in the future. Milei’s government seems to be doing its part to get us there.
