Argentina's 10-point freedom plan (the Milei pact)
An update on massive reforms in a broken country, and President Milei's latest manifesto
"I didn't come to lead sheep. I came to wake up lions. And the lions are awakening."
Javier Milei, President of Argentina
Regular readers will know that I live in Buenos Aires, the capital city of Argentina. I've been here for over fifteen years, having moved here after marrying an Argentine woman that I met in London 23 years ago. My two kids were born in England, and love visiting it, but have mostly grown up here.
Over that time, there hasn't been a moment when the economy or financial system haven't been, well, complicated. At one point, the direction of political travel was so bad that I thought I might have to take my family elsewhere.
You may wonder why I would want to live here. Well, Buenos Aires is a beautiful city, and the country basically has a European culture with a touch a Latin flair. Most of the population, perhaps 90%, is descended from immigrants from Europe, mainly Italy, Spain, the UK, Ireland, Germany, France, and so on. I also like steak and red wine, which are here in abundance.
In any case, I've learnt to adapt to all the complications, such as the great difficulty of getting money in or out of the country at various times, or local consumer price inflation rates that have just kept going up. That's as the local peso currency went rapidly down (a dollar bought about three pesos when I arrived, now it's around 1,000). Inflation over the past year exceeded 250%.
But things are changing fast.
As has been widely reported in recent months, with the election of the new President Javier Milei, Argentina is going through little short of a political and social revolution, albeit a peaceful and democratic one.
Out with the left-wing, interventionist, and deeply corrupt Peronist left. In with a new, freedom-loving, business-friendly, market-oriented, small government alternative.
Milei calls himself a "liberal libertarian". Both words signify a commitment to freedom, and the use of "liberal" should not be confused with the modern North American meaning, which signifies the "progressive" left. Milei's political party is called La Libertad Avanza, or Liberty Advances.
Around a century ago, Argentina was one of the richest countries in the world, on a per capita basis. It's the eighth largest country in the world, behind India, but with a population of just 48 million, which is similar to Spain.
It's also blessed with a lot of natural resources, including highly productive farmland, as well as oil, natural gas and mineral deposits. But many, many decades of bad politics - whether under democratic, quasi-democratic or dictatorial governments - has made it much poorer.
Official figures suggest over 60% of Argentines now live in poverty. And that's absolute poverty, meaning struggling to house and feed themselves and their families. Not the fake relative poverty figures used in many countries such as the UK, which are benchmarked against average earnings. (This is not to say that there isn't some genuine, absolute poverty in such places.)
Argentine voters seem to have finally reached breaking point when it comes to the status quo. In December, they elected a president with a radically different vision for the country.
Since Milei took office on 10 December last year, just three months ago, there has been a whirlwind of reforms already enacted or proposed. In fact, there's so much going on that it's difficult to keep up, as attempts are made to repeal hundreds of laws and regulations that stifle businesses and societal freedoms, many of them dating back decades.
The reforms have come mainly in the form of wide-ranging presidential decrees and an "omnibus law", with a long laundry list of legislation to repeal the frictions in the system.
The decrees have been partially stopped with multiple legal challenges, often presided over by judges that are friendly to the left, and even friendlier to cash backhanders. Meanwhile, the omnibus law got close to approval in the Congress, after some hard negotiation and amendments, but then certain moderate opposition delegates withdrew their support at the last minute.
Argentina's political system is probably different to the one where you live. The president is elected directly via a national vote. Whereas delegates in the senate and lower house are elected at the provincial level, with a system that has its own quirks (such as three senators for each province, irrespective of vast variations in provincial populations). Elections for half the seats coincide with the presidential election, and the other half are elected at mid-terms two years later.
The main point is that new presidents, including Javier Milei, often take office with only a modest minority of delegates in both houses of Congress. Thus they have to persuade other parties to vote with them in order to pass any legislation. Milei's party currently has just seven senators out of 72, and 38 out of 257 in the lower house.
Notwithstanding this challenge, the new government has already achieved much. It started by slashing the number of government ministries in half. Inflationary money printing - used to fund a huge fiscal deficit previously - has been stopped dead, and the money supply has been flat since December.
The government has been clear, on many occasions, that a balanced budget in 2024 is "non-negotiable". This has required sweeping cuts to public spending (which is littered with waste and corruption).
As part of this, the government has been auditing all spending on welfare programmes, as well as quangos that technically sit outside government but that are funded with public money. Also, they have been kicking out intermediaries from the distribution of welfare payments and food programmes, which make up a huge proportion of public spending.
That's because those intermediaries are usually corrupt "managers of the poor". They divert funds intended for the poorest to themselves, overpay suppliers for products in return for kickbacks, and even threaten to withhold cash from people that really need it, if they don't turn up to street marches and protests. A government phone line, set up so that people could denounce such activities, logged about 10,000 cases related to just one protest, a couple of months ago.
The government has also been shutting down loss-making state media agencies and diversity bodies, which cost a lot of money but produce little. A lot of the staff do virtually nothing for their salaries, or use their positions for left-wing political purposes, when they're supposed to be neutral.
In Argentina, there are so many public sector employees that do nothing in return for their salaries, that there's a slang word to describe them. They're called "gnocchis", as in the Italian potato-based pasta.
That's because, traditionally, people ate gnocchi on the last day of each month. Salaried gnocchis are those that do nothing except collect their pay at the end of the month. Such jobs were previously handed out as political favours, or to reward family members and close friends of politicians and senior functionaries.
Every day, it feels like a new scandal comes to light. This ensures that Milei's approval rating has stayed high so far, as he weeds out all the corruption and waste. La casta politica, or the political caste, have nowhere to hide anymore. More and more people are starting to realise the depth of the rot, and how much money the casta has been stealing, while most of the country lives in poverty or struggles to get by.
The approval ratings are important, because the middle class is suffering. That's as the chronic economic patient that is Argentina ingests its first doses of strong medicine. Consumer prices are still going up rapidly, as the government withdraws excessive subsidies from transport (trains and buses) and energy bills (gas and electricity), as part of its plan to balance the books.
As recently as December, a ride on the underground subte trains in Buenos Aires cost less than 20 US cents. Obviously that was far below the cost of providing the service.
Within a few months it will be around a dollar. That's actually still cheap by international standards. But it's a big deal for lower-paid workers who have to travel to and from work every day. Meanwhile, my monthly electricity bill is only about $15. I expect it to triple within a few months. Again, it will still be cheap by international standards, but you get the idea.
At the same time, for a range of reasons, the local peso currency has strengthened against the dollar in recent months. Combined with ongoing price rises, and in dollar terms, I estimate that my cost of living has gone up 50% in just three months. That's just the latest example of how volatile this place can be. I fully expect another sharp peso devaluation over the coming months.
Milei's programme of reforms is slightly stalled at the moment. But I reckon that the government didn't expect its initial blitz of proposed reforms to make immediate headway. Instead, they achieved two things.
Firstly, those who oppose reforms can now be easily identified as not wanting a better future for Argentina, or having their fingers deeply pushed into the many corruption pies.
Secondly, it could be a straightforward negotiating tactic. Ask for far more than you expect to get, and then make some concessions to get the main items over the line.
To re-seize the political initiative, Milei has now launched something called the "25th of May pact".
This will invite the governors of Argentina's provinces to discuss, agree and sign - on 25th May - a reform pact that sets out the direction of travel. Again, those that don't participate will be flagged as preferring the stagnant and corrupt status quo ante.
May 25th is an important date in Argentina, since it marked the end of the May Revolution in 1810, when the locals rose up against their Spanish overlords, and the first local government was established. (The formal Declaration of Independence was on July 9th 1816, another important date in the Argentine calendar.)
Argentina's 10-point freedom plan
The proposed pact is a ten point plan. I've translated those points as best I can below (in bold), with a bit of explanation under each one. I think you'll agree that it's both a principled and ambitious framework for freedom.
1. The inviolability of private property.
This should be a given, unless you are a communist, hard-left socialist or fascist. However, successive Argentine governments have been guilty of confiscatory practices in the past. For example, in 2008, the Peronist government under Cristina Kirchner, confiscated all private pension funds, allegedly to "protect" them from the global financial crisis.
2. Non-negotiable fiscal equilibrium.
In other words, a balanced budget is a must. Future governments would not be allowed to spend more than they receive from taxes. The country would have to live within its means. In fact, Milei wants to make it a criminal offence for governments to print money or run up debts in future.
3. The reduction of public spending to historic levels, around 25% of gross domestic product.
Presumably this would include the interest costs of existing government debt. It's unclear if it would include spending at the provincial level, although I'm guessing not. For reference, many developed countries sit around spending 40% of GDP, and often above 50% if they have particularly large welfare states. Milei wants as much as possible of public "services" to be handled by the private sector.
4. A tax reform that reduces the tax burden, simplifies the lives of Argentines, and promotes business.
Self-explanatory really. Lower and simpler taxes. Argentina has many absurd taxes that create economic distortions, including top-line turnover taxes for businesses (in addition to sales taxes), wealth/asset taxes for individuals, and even a tax on bank transfers.
5. Redefining the current model of federal tax sharing, that forever ends the current model of extortion.
This is about how part of central government taxes are re-distributed to provinces. Much of this is discretionary, which means the federal government of the day can use it to buy political influence around the country. Milei wants to get rid of that discretionary patronage and font of corruption.
6. A commitment from the provinces to advance the exploitation of the country's natural resources.
This is about removing barriers to areas such as mining, oil and gas drilling, and probably steps to increase agricultural production too. Past policies by rapacious governments either prevented investment in projects or resulted in falling production. Argentina is rich in agricultural land, oil and gas reserves, and deposits of gold, copper and lithium, to name a few.
7. A modern labour reform that promotes formal work.
Current employment law and taxes on employment are absurd in Argentina. It's very hard to make anyone redundant without ending up in legal proceedings. As a result, formal employees are liabilities and huge numbers of people are employed on the black market and paid in cash, perhaps around 40% of the total. Some of the laws date back to Juan Peron, who modelled a lot of his populist policies on Benito Mussolini, the Italian fascist dictator.
A couple of examples show how bad things can be.
A friend of mine caught an employee stealing money from his business, but still had to pay the guy off in order to avoid an expensive lawsuit. Meanwhile, a private club here in Buenos Aires, with a very long history, was effectively bankrupted by ex-employees demanding massive severance pay.
Milei wants to make big changes to reduce risks for employers, thus promoting job creation, and eventually leading to better wages as demand for labour improves.
8. A reform of the state pension system that makes it sustainable, respects those that contribute to it, and permits, for those that prefer, signing up to a private retirement system.
All companies have to make massive contributions to the state pension system on behalf of any formal employees, as do the self-employed. The end result is often pensions that are a pittance, since funds are often frittered away or not invested well. Milei wants to open the system up to competition and the private sector. (Neighbouring Chile has a successful private pension system, set up in the 1980s.)
9. A structural political reform that modifies the current system, and returns to aligning the interests of representatives and those represented.
This is a bit vague. But it may involve re-thinking the number of delegates in the Congress per province, so that they're more aligned with population sizes. Or perhaps he's thinking about re-drawing provincial and district boundaries, to even up population splits. We'll just have to wait and see.
10. The opening of international trade, so that Argentina returns to being an active participant in the global market.
Argentina has historically had massive barriers to trade, including huge tariffs levied on both imports and exports. The former leads to scarcity and higher prices, often for crucial inputs to production. The latter results in far lower production, since it snatches away profit from producers. This is pure protectionism, and makes the country far worse off.
Also, in the recent past, importers had to get permission for each shipment into the country. This created a hotbed of corruption, as permits were traded for bribes. Milei wants trade to be as free as possible, at least in terms of Argentina's own set of rules and levies. (He can't influence foreign trade protectionism, such as that found in the European Union trade bloc.)
Will Milei's 10-point freedom plan actually be enacted?
Those are the ten points. I hope you'll agree that they're pretty ambitious.
This 10-point plan, even if signed, won't have any legal status. But it will set a tone and direction, amounting to a manifesto for deep reforms in a country broken by the bad policies of the past. We will have to see how much support Milei can garner from the provincial governors.
In the meantime, his government continues to propose new legislation to pass through Congress, much of it taken from that original "omnibus law" that they couldn't get over the line.
Milei still has a very tough battle ahead. There's plenty of opposition, either for ideological reasons or because la casta (politicians, unions, corrupt business people, socialist popular movements, gnocchis etc.) would like to preserve their privileges of corruption.
As of now, there is a deep recession and a lot of people are struggling. Political support is holding up, however, in the hope of a better future down the line. But, if there is no sign of an economic rebound by the middle to latter part of the year, it's highly uncertain whether the government could survive.
There are plenty of agitators looking for a chance to riot and overthrow the government, and it's not like that hasn't happened before in Argentina. First and foremost, Milei has to keep the poor fed, as revolutions are born of hunger. He also has to maintain the hopes of the middle classes for their children's futures.
The hard-left wings of Peronism, and other socialists, accuse the new government of being a "dictatorship". Which is laughable given that Milei was just elected with the biggest majority since Argentina's return to democracy in 1983, and that his whole ideological North Star is more freedom for ordinary people and businesses.
Just today, on international women's day, a left-wing journalist accused the new government of being misogynistic, due to lack of support for a planned women's march. This was during the daily press conference, which is part of the government's commitment to transparency (something that certainly never occurred during Peronist administrations).
The official government spokesman was delighted to point out that 45% of the current government cabinet consists of women, including powerful positions such as the foreign minister and security minister. Whereas in the past three Peronist governments, the equivalent percentages were 20%, 25% and 18%. What's more, the current Vice President, who has the important job of chairing sessions in the Senate, is also a woman.
Such a shame to burst the journalist's bubble with facts rather than feelings! But that's the only way that freedom-lovers can hold back the advances of socialist thinking, and the poverty and authoritarianism that it produces.
It's an exciting time in Argentina, and I'm cautiously optimistic about its future for the first time. But there are still a lot of hurdles in the way.
Fingers crossed...
By the way, on Friday I sent out the latest chapter of my investment book (for paid subscribers), this time dealing with investors' dangerous psychological biases and how to overcome them. If you haven't seen it yet, check your email inbox or take a look here. A further chapter about why short-term trading can't work will follow very soon. And I've already started the next one after that, which deals with the concept of risk, an area that is often confusing and misunderstood.
Also, next week, I'll be working on a new update about the ex-UKIW portfolioof stocks that I track.
Please send comments or questions to the email shown below.
Until next time,
Rob Marstrand
email: ofwealth@substack.com
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