Argentina: two significant developments
Plus some other updates from the world's greatest freedom project
Time for an update from the place that I’ve called home for over seventeen years, and now the home of the world’s greatest freedom project. Out with big government, in with big liberty.
The streets of Buenos Aires feel pretty quiet today (Monday). There’s a double public holiday on Monday and Tuesday, for carnival. Yes, that happens here. Although it’s nothing like the scale of Brazil’s festivities, and more like an excuse for some down time.
As summer continues to progress, a lot of people will have made the most of the four-day weekend to go to the seaside, or otherwise get away from the city.
Peak holiday season starts after Christmas and runs through January. But the prices of hotels etc. are cheaper in February, once peak demand has passed. So many choose that month for their vacations. Here in the city, things get back into full swing in late February / early March, when the schools and universities re-open their doors.
Argentina’s freedom-loving government, under “liberal-libertarian” President Javier Milei, continues its attempts to reverse decades of decline and stagnation. This is being achieved by eliminating the previously large fiscal deficit (done - largely by slashing public spending), putting a stop to rampant money printing (done), aggressive deregulation (ongoing), and simplifying and cutting taxes (ongoing).
In the past couple of weeks there have been two notable developments on this path.
Argentina and the United States agreed a trade deal, and the government crossed a significant hurdle in its attempts to push through major reforms to antiquated labour / employment laws.
I’ll start with the latter, which is actually the most important.
But first, I was interviewed about Argentina in late December by Liam Halligan. Liam is an economist and journalist in the UK. He’s written an economics column for The Telegraph for about 25 years (if I’m not mistaken), and has regular TV appearances on GB News. He also has a column on Substack called “When the facts change” (see here).
You can watch the full video here. The segment about Argentina begins around minute 42. (Earlier guests talk about UK monetary policy and the impact of net zero policies on the car industry. See also the notes below the video.)
I’d have sent this earlier, but wanted to include it with an update about Argentina. January turned out to have other distractions, such as the feverish silver market (now trying to work out where to go, after a substantial crash).
Anyway, back to the latest in Argentina.
Argentina can’t progress without major labour reforms
I’ve long held the view that Argentina can never really progress economically without drastic reforms to its antediluvian labour laws. Well, okay, not dating from quite as far back as the biblical flood. But old enough.
The reform bill was debated in the Senate on Wednesday 11th of February, in a marathon session that ran well after midnight, before voting could take place.
Naturally, there were protests in the square outside the congress building during the day, organised by unions and the usual agglomeration of hard left groups of agitators. (The irony being that the latter crowd are mainly professional work-dodgers, so are hardly going to be affected by labour reforms.)
As the day wore on, a hard core hung around to riot and smash up the square, in predictable manner.
Riot police had to face down a hail of Molotov cocktails (petrol bombs), hurled masonry hammered from paving slabs, and steel nuts launched from catapults. Dozens of people were eventually arrested, and quite a few police were injured.
Here’s a photo from the day…
Source: Infobae
The current labour laws date all the way back to 1974, instigated under a Peronist government. In fact, Juan Domingo Perón himself was president again back then. That’s having returned to Argentina in mid-1973 from exile in Spain, where he had lived under the protection of the fascist dictator Francisco Franco. But Peron died in July 1974.
In spectacularly nepotistic fashion, he was succeeded as President by his second wife Isabel. Under her rule, the economy faltered and terrorism flourished (of both communist and anti-communist varieties). A military dictatorship seized control in 1976, remaining in power until 1983.
If you think that sounds like it was another age entirely, then you’d be right. But Argentina’s current labour laws remain anchored in ideology that is five decades old, and certainly not adequate for any modern economy.
In short, the labour market is incredibly inflexible. This means that labour isn’t necessarily engaged where it is most productive or best rewarded. What’s more, removing employees - whether via redundancies or for cause - is incredibly expensive.
There is a huge employment litigation industry that chases vast payments. Because the judicial settlements tend to be huge - and often quite arbitrary - most employers settle before it gets to court. But the amounts are still large in what amounts to an extortion racket.
I know of at least one business that had to make a large payment to a fired employee after he was caught stealing. And a private members club that was bankrupted by redundancy obligations to long-serving staff.
This makes businesses - especially small ones - very nervous about hiring anybody. Add to this the huge social security contributions attached to formal employees, which come to around 44% of their take-home pay (before income tax), and it’s perhaps no surprise that around 40% of all employment in Argentina takes the form of undeclared, black market jobs.
Just let that sink in. Around 40% of all the people working in Argentina are “off the books”.
What’s more, for those that have been in formal employment for a long time, they have a massive disincentive to move elsewhere. That’s because they would lose their right to a potentially large severance payment, since such amounts are linked to length of service.
Inevitably this means that a lot of people are doing jobs they don’t like, or that pay less than alternatives, as well as employers being stuck with plenty of sub-standard workers that are too expensive to fire.
Milei’s reforms aim to lower the non-wage cost and risk of employing people, encourage more formal job creation, encourage job mobility, and create clarity around severance costs. Over time, a more flexible labour market should also create more demand for workers, and thus increase wages.
Key changes (very condensed) include:
Clarity that severance payments should only be calculated with reference to base salaries, and include not bonuses (making it easier for employers to incentivise good performance) or non-cash benefits.
Clarity on the interest rates added to awards between when an employee leaves a job and eventually receiving payment. (These amounts were often inflated by activist and/or corrupt judges.)
The creation of segregated employment insurance funds to cover future severance payments, funded by regular monthly contributions by employers. Over time, this will give employers more certainty, and remove the contingency risk of having to suddenly make huge payouts.
Simplify the employment registration obligations of employers to only online registration of employees with the federal tax authority (significantly reducing administrative burdens and past paperwork).
Clarifying and tightening the rules on medical leave (e.g. obliging employees to present medical certificates in certain circumstances).
Reduction of social security payments for new employees for the first four years of employment (to encourage new hiring in the formal sector).
...et cetera, et cetera...
What’s more, the bill includes a series of other significant reforms tucked into its pages, mainly involving tax cuts. Such as:
Elimination of capital gains taxes levied on the sale of all real estate by private individuals. Currently, only someone’s own home is exempt. This should help to foment more transactions, which will stimulate the economy. (This follows the elimination of property transfer taxes in 2024, which were similar to the concept of stamp duty in the UK - although far lower than the UK’s current rates.)
What’s more all residential rental income will be exempt from income tax. Great news for landlords and ladies, and a far cry from the absurd rent controls imposed by the previous, Peronist government, which crushed supply. (This could reduce the cost of renting for tenants. What’s more loads of rental income is undeclared currently, and received in cash. This could free up that cash to be more easily spent, sending it back into the economy.)
Removal of certain taxes levied on insurance premia, cell phone services, luxury goods, and some vehicles.
All interest on fixed-term deposits will be exempt from income tax, whether received in pesos or other currencies. (Previously this only applied to peso deposits. Mind you, it’s a moot point, at least for now. I recently looked up what my bank would pay on dollar term deposits, and it was only 0.05% a year!)
Those are actually some pretty major tax reforms, buried within the labour reform bill.
Still, why not? They sound good to me.
Personally, I believe that the Milei government would like much more radical reforms to labour laws. But, since it still has a minority of seats in both houses of congress, this is the most it can get away with for now. Certain provisions had to be dropped already in the political horse trading that got the bill this far.
If Milei gets a second term after elections in 2027, and ends up with many more seats, then I’d expect much more to happen. That’s along with other areas that require congressional approval, such as major tax reforms (such as how federal taxes are shared between central government and the provinces).
There could even be a move to change the current constitution, which was first approved in 1853, but “Peronised” in 1957, and last amended in 1994.
The bill still needs to go to a final debate and vote in the lower house this week or next, and there could still be some minor changes to get it over the line. But it seems highly likely that it will pass, marking a crucial point in the structural reforms that Argentina so desperately needs.
Incidentally, the unions are planning a general strike on that day, which is likely to bring transport networks to a halt (trains, buses, maybe flights).
Argentina-USA trade agreement to boost investment and bilateral trade
Milei has been buddying up to the United States since he came to power in December 2023, first to the Biden administration and then to Trump & Co. This goes beyond economics, and also involves foreign policy, military co-operation, and so forth.
Given Trump’s “Donroe doctrine” of focusing US foreign policy on the Western Hemisphere (i.e. the Americas), it makes sense that the two countries should try to find mutually beneficial arrangements.
A couple of weeks ago the news broke that Argentina and the United States have agreed a trade deal. This still requires ratification in the Argentine congress, but that seems pretty likely from the reports that I’ve read.
The Milei government claims that this could lead to increased exports to the US of around $1 billion a year.
Key planks include: