A Change of System, Not simply a Change of Regime
Changing policies without changing the system is like changing the oil of a blown engine, The effects are transitory and the results will be frustrating.
It never ceases to surprise when I hear an economist claim that, for Argentina to perform well macroeconomically, the government simply needs to consistently adopt sensible policies—just as some of our neighbors have done in recent decades. They seem to ignore an irrefutable fact: in 43 years of democracy, no government has been able to do so, even when they tried—with one single exception, Carlos Menem during his first presidency. Don’t they ever wonder what explains this peculiarity? Is it coincidence—or causality?
Perhaps the confusion stems from not understanding that what Argentina needs is not merely a radical adjustment in economic policy or placing greater emphasis on some instruments in relation to others—such as fiscal balance or reserve accumulation. What the country needs is a change of economy system understood as the set of formal and informal rules, relationships, and principles that organize and govern the production, distribution, and exchange of goods and services within its borders. Changing the policy regime without changing the system is like changing the oil in a blown engine; it can only speed up the journey from hope to despair.
Most democratic countries, even in Latin America, operate — with varying degrees of intensity—under what can be called a competitive open-market system. Argentina is an exception. Since 1946, it has operated under a peculiar system of its own. In the early 1980s, economist Adolfo Sturzenegger described it as “socialism without central planning and capitalism without markets.” I find it more accurate to call it a populist–corporatist–protectionist system. Its exceptional nature manifests itself in two ways. First, in no other country there has there been such a close identification between the unions and a political party, and between that party and the state. Second, since 1946, no other country has spent more years in recession or endured such persistently high inflation.
Perón, who was the architect of the system, used to say that, as in botany, in politics transplants must adapt to their environment. A declared admirer of Mussolini, he implanted in Argentina his own version of fascist corporatism. But unlike Il Duce, instead of co-opting capital he fought against it, forging a “limping” and economically unviable version of corporatism. Beginning in 1955, his successors corrected this original flaw by incorporating capital, including multinationals, thereby injecting more dynamism into the system. From then until 1983, Argentina alternated between two versions of the corporatist–protectionist system: a populist one, based on expanding consumption, and an authoritarian one, based on boosting investment and industrial exports.
The first was economically unviable and ended in external crisis, which opened the door to the second, which proved to be politically unviable. By design, the corporatist-protectionist system tends to be politically dominated by populism, whose boom-and-bust cycles are closely related to international commodity prices. It is no coincidence that populist parties reached their climax in 1946, 1973, 2008, and 2012—years when commodity prices peaked.
Completing the transition to a competitive open-market system has proven far more difficult for Argentina than for countries that suffered four decades of communism. In 1990, Poland’s GDP per capita was 23% lower than Argentina’s; today it is 77% higher. Moreover, its economy is one of the most dynamic in Europe. The reason is simple: when the communist system collapsed, there were no entrenched economic interests capable of resisting a transition to an open and competitive system. In contrast, decades of corporatism and protectionism in Argentina created interest groups that are not prepared to give up power or economic privileges.
George Stigler once said that “all durable social institutions, including common and statute laws, must be efficient.” What does efficiency mean in this context? That it achieves the economic interests of those who control it. From this perspective, Argentina’s populist–corporatist–protectionist system is highly efficient.
Going back to the initial question, Argentina is not where it is due to an unlucky coincidence but due to an evident causal relationship. The incentives such system creates for politicians, business leaders, and union leaders explain the country’s dismal macroeconomic performance —which to any foreigner seems incomprehensible.
The only relatively successful attempt to pull Argentina out of this perverse system was under the Convertibility regime. When Domingo Cavallo became Minister of Economy in 1991, he clearly understood that, to resume growth, Argentina needed to change its system, not merely its policy regime. Two hyperinflations—and the threat of a third—convinced him that, unless financing of the fiscal deficit with money printing was eliminated, such change would be impossible. He persuaded Menem of the benefits of the Convertibility regime and, thanks to the resulting monetary stability, for ten years the country advanced toward a competitive open-market system.
Convertibility was much more than a stabilization plan: it was a large scale attempt at systemic change. Its collapse in 2001 demonstrated the enormous power of the interest groups born and bred under the corporatist–protectionist system. The instrument they used to restore it was the devaluation of the peso—a cog at the heart of its machinery. Printing pesos in excess and then devaluing them has been a recurring cycle since 1946.
The point is that monetary stability is a necessary condition for Argentina to complete its transition to a competitive open-market economy. It is impossible for entrepreneurs to estimate the return on their investments under high, persistent, and volatile inflation, which is a structural feature of the current system. That is why a regime that guarantees monetary stability is the “mother of all reforms.” We can liberalize labor laws, simplify and reduce taxes, and open the economy—but none of these reforms will bear full fruit without monetary stability. Moreover, in its absence, entrepreneurs will always have a strong incentive to “secure” their profitability through privileges, special regimes, tax exemptions, and preferential exchange rates—all of which reinforce the corporatist–protectionist system.
Javier Milei understands this well. Indeed, he entered politics precisely to change the system. But to achieve such lofty goal, the first and most important reform he must implement is one that ensures monetary stability. What he has accomplished in these two years is extraordinary—especially in changing the terms of public debate on inflation and fiscal deficits. Yet even though the government has succeeded in reducing inflation, 2% per month is still very high. Despite impressive progress on the fiscal front, markets doubt its sustainability. And this is not the government’s fault: investors have been burned too many times by Argentina.
If there is one lesson to learn from Argentina’s history is that the order of reforms is not trivial—it determines the outcome. Successfully completing the transition to a competitive open-market system will take time—certainly more than a one presidential election and several legislative ones. Given the short electoral cycle, the historical preferences of the median voter, the inevitable costs of systemic change, and the obstructive power of vested interests, it will be difficult to break the tyranny of the status quo without a reform that eliminates the peso—in other words, that renders the populist–corporatist–protectionist system inoperable.
A floating exchange-rate regime, as advocated by the IMF staff and some well known economists, has very little chance of providing the monetary and exchange-rate stability required to achieve systemic change. Only official dollarization—granting the dollar legal tender status and establishing the conditions to permanently withdraw the peso from circulation—offers a realistic chance of reaching that goal. It is a financially and legally viable alternative, and under current conditions even easier to implement than in December 2023. Moreover, it would be a popular measure, since despite the determined efforts of successive governments, when it comes to the currency, Argentines have already made their choice: they prefer the dollar. The only thing missing to move forward with dollarization is political will.