When Argentines vote in midterm elections on Oct. 26, the main issue is simple: Do they want to stabilize their economy once and for all?
The country’s economic future depends on whether voters can muster the political will to back President Javier Milei’s original coalition and his reform program — or backtrack by empowering opposition parties that promise more spending and debt default.
Economic stability has always been Argentina’s most elusive dream. For over eight decades, the country has lurched from crisis to crisis, trapped in a cycle of deficits, inflation and dashed hopes. Governments have repeatedly tried to restore order, and repeatedly failed — not for lack of effort, but because the necessary reforms never lasted long enough for confidence to take hold.
Argentina’s chronic weakness is fiscal indiscipline. Politicians tend to spend beyond the country’s means, issue debt they cannot credibly service, print money to cover the difference and then rely (explicitly or implicitly) on inflation and defaults to wipe out the value of the money and the debt they issued. The usual script plays out: Deficits cause the debt to grow and markets demand ever-higher interest rates on that debt, causing it to grow even faster until it surpasses the government’s ability to pay. The result is panic, hyperinflation and default.
There have been two major modern attempts to escape this trap — both bold, both promising, both ultimately undone.
In the early 1990s, President Carlos Menem and Finance Minister Domingo Cavallo introduced the Convertibility Plan, pegging the peso one-to-one to the U.S. dollar, slashing spending, liberalizing trade and adopting extensive financial reforms. The peg was meant to prevent the government from just printing money to pay for its deficits; instead, each peso had to be backed by a dollar in Argentina’s foreign exchange reserves. For a time, inflation vanished and growth returned.
But the government’s inability to adjust the exchange rate proved damaging when, in the late 1990s, Argentina was hit by several shocks, including dollar appreciation and a slump in agricultural prices, which led the peso to become overvalued. Markets lost more confidence as Argentina’s deficit grew. By 2001 the system collapsed in default, devaluation and political chaos.
The second experiment began in 2015, under President Mauricio Macri, a pro-market businessman. He avoided the rigid dollar peg, letting the peso float in the foreign exchange market. Rather than imposing austerity measures, he opted for more gradual cuts, hoping that sustained political support would translate into enhanced credibility.
The markets initially applauded, but over time judged the reforms too tepid, especially when Mr. Macri failed to bring the deficit down. By 2018, capital started to flee the country. Mr. Macri turned to the International Monetary Fund to borrow the money that markets were unwilling to lend. When the 2019 primaries signaled that Mr. Macri’s profligate predecessors would be returned to power, market confidence collapsed, leading back to crisis.
Four years later, citizens fed up with inflation and recession voted for change in the form of Mr. Milei, a libertarian economist and self-described anarcho-capitalist. When he assumed office in December 2023, he pledged to end Argentina’s chronic fiscal chaos. His program paired a huge cut in spending with structural reforms including deregulation and privatization measures, but maintained controls on Argentines’ ability to take money out of the country.
Mr. Milei’s program initially delivered a surprisingly fast recovery: Inflation fell from triple digits in December 2023 to around 30 percent this past August. In April, the government also secured a $20 billion I.M.F. loan, and used the occasion to eliminate the restrictions on Argentines’ ability to buy and sell U.S. dollars.
For a moment it looked as if Argentina might truly break its cycle. The I.M.F. loan package provided Mr. Milei’s government with critical foreign reserves and amounted to a vote of confidence in Mr. Milei’s program, leading to a rally in Argentina’s bonds that made borrowing cheaper.
But two recent political jolts shifted the momentum. First came corruption accusations involving Karina Milei, Mr. Milei’s sister and a close adviser, which cast doubt on the president’s commitment to a new, clean politics. Then came an electoral loss last month in Buenos Aires Province, the country’s biggest. That combination began to sow doubts. Could Mr. Milei sustain his agenda if his hold on power wobbled? Would Congress cooperate with his model? Would his opponents come back into power and roll back his reforms?
Those doubts matter deeply. In the years ahead, Argentina must make more than $45 billion in foreign debt payments, including over $15 billion to the I.M.F. To do that, it must be able to borrow from global capital markets at reasonable interest rates — but that ability hinges on credibility. Without it, markets are willing to lend only at prohibitively high interest rates, pushing the country toward the very default it hopes to avoid.
This is a classic pitfall known to economists as the multiple-equilibria trap: When investors feel optimistic, they’re willing to lend money inexpensively, which drives down interest rates and helps the economy grow, while keeping debt service low, thereby confirming their initial hope. Conversely, if they become pessimistic, they demand high-risk premiums, causing interest rates to soar, which chokes off investment and makes the public debt more expensive, justifying their fear of a crisis.
Last week, the U.S. administration committed to a $20 billion currency swap — effectively a short-term loan — with Argentina. The move echoed the vow made by Mario Draghi, then the president of the European Central Bank, at the height of the euro crisis in 2012, to do “whatever it takes” to defend the euro. His words, backed by believable institutional power, changed expectations such that interest rates fell without a euro being spent. The Trump administration’s bailout was the closest thing to a Draghi-style credibility backstop Mr. Milei, who visited the White House on Tuesday, could hope for.
Such external lifelines, though, can carry a country only so far. What matters is whether this support will filter through both markets and politics to move Argentina to a virtuous cycle of credibility. Mr. Milei has shown his commitment to fiscal discipline and responsible management of the country’s money supply. Ultimately, Argentines need to reach a political consensus around the idea that stability is not a partisan slogan but a foundation for growth.
The pivotal question on Oct. 26 is whether they will signal to themselves, and to markets, that Argentina is ready to break with old habits and anchor its future on a commitment to stability — whatever it takes.
Ricardo Hausmann is a professor of the practice of international political economy at the Harvard Kennedy School and the director of the Harvard Growth Lab. He was the Venezuelan minister of planning from 1992 to 1993 and the chief economist at the Inter-American Development Bank from 1994 to 2000.
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