MILEI'S GOVERNMENT IS VERY FRAGILE

 MILEI'S GOVERNMENT IS VERY FRAGILE

Although public opinion widely considers Milei's government to be very solid and, consequently, potentially successful and long-lasting, this paper argues that, despite appearances, it is actually quite fragile. When agitation from affected sectors of the population, who are numerous, becomes active, the government may find itself unable to respond. The possibility of the regime's collapse or at least its decomposition is not entirely remote. The recent passage of the foundational law does not resolve its underlying structural weaknesses.

ORIGIN AND SOCIAL BASE

Will the massive bloc that voted for Milei and seems to still support him maintain stability?

There is a widespread consensus that Milei represents the frustration of large segments of the population against traditional parties that have been eroding their quality of life for decades. Many saw in Milei a clear expression of discontent and anger against the prevailing way of life.

The backbone of his support comes from the business community, which believes that under this government, continuing within a closed economy is unsustainable. Argentina's increasing isolation from the global market and chronic shortage of foreign currency have exacerbated the situation after exhausting the country's capacity for new external debt.

The fundamental agreements sustaining Milei's government include the conviction among dominant economic groups that the only way out of the crisis is to open the economy to attract massive foreign investors focused on natural resources, and to redistribute national income in their favor by reducing wages and social benefits for workers.

Moreover, the international banking sector viewed Milei favorably as someone likely to ensure repayment of substantial loans.

In essence, diverse sectors with conflicting needs and interests placed their hopes in the outsider, the new, the promise of change.

That was before. Now that they are in power, immediate questions arise: Will this hope translate into support? How much of this support can be sustained over time? Which of these supporters will defect to the opposition upon feeling betrayed? In short, will this massive bloc that voted for and seemingly still supports Milei maintain stability?

Anyone serious about analyzing the country's future must venture an answer on this matter.

BRINGING DOWN INFLATION IS NOT ENOUGH

But once inflation is reduced, assuming it can continue, a matter no one can guarantee, the question arises: What next?

The new government's top priority has been to curb inflation and stabilize the chaotic macroeconomic indicators left behind by the Fernández government. The entire country understood that continuing on the previous path was unsustainable, allowing Milei's government to sail favorably through measures so severe they condemned hundreds of thousands more to indigence on top of those already living in such conditions.

However, once inflation is curbed, assuming it can continue, the question arises: What next?

This is something the government has yet to explain beyond its desire to attract foreign investments.

HERE BEGIN THE DISCUSSIONS

The assumed strong support from the business community for the government is starting to show cracks, the first being the struggle between exporters and producers for the domestic market.

The assumed strong support from the business community for the government is starting to show cracks, the first being the struggle between exporters and producers for the domestic market. The former, especially agriculture and regional economies (such as fruit growers and vineyards), are demanding a new devaluation since the previous one was eroded by inflation. The latter, of course, need a stable exchange rate to prevent cost increases.

Provincial governors threaten to switch to the opposition if the government does not allocate budget or projects to their provinces, something they can show their voters. Without means to meet their voters' expectations, they fear losing the next election and the significant interests that come with managing a provincial budget.

The IMF and major international banks are concerned that such a harsh adjustment is unsustainable over time and fear that a popular uprising, which Argentina has experienced before, could seriously jeopardize the country's ability to repay its national debt in the future.

POLITICAL WEAKNESS

To achieve some stability, the government must offer opportunities for profit to those who supported it. In a crisis like the current one, it is impossible to satisfy everyone.

We must consider that in just 6 months, more than 40 officials have been dismissed, and according to reports, there are still hundreds of positions awaiting appointments to various government departments.

The government's enormous difficulty in getting Congress to approve even a single law is simply a political reflection of these differences.

While there is a basic agreement that the economy needs adjustment to curb inflation, there is intense fighting over who will bear the brunt of this adjustment. Each faction fiercely clings to its share of the gains. This underlying explanation is behind many of the controversies seen on TV, where representatives of each group strive for additional benefits for themselves.

Milei may have managed to pass the "foundational law" under extremely distressing conditions, after 6 months of intense efforts, but this does not change its weakness at all. On the contrary, having had to cut nearly two-thirds of his project confirms his lack of political clout.

To achieve some stability, the government must offer opportunities for profit to those who supported it. In a crisis like the current one, it is impossible to satisfy everyone. The only way to climb out of the economic hole within this economic system is to attract major foreign investments in sectors where the country has comparative advantages, currently in natural resources, energy, agriculture, and mining.

WILL INVESTMENTS COME TO ARGENTINA?

What reason is there to choose Argentina over any other more stable and secure place?

The first requirement any investor asks for is the opening of the exchange market. They want assurance they can withdraw their profits without restrictions. They also demand legal and tax stability. They refuse changes in the rules of the game at any time. Additionally, they seek an independent judiciary or, failing that, access to international jurisdiction. The RIGI has granted them all this and more.

Will these facilities be enough to persuade them to come?

It's not easy to know, but there are some assumptions that suggest they might:

Interest rates in the USA are not only currently high but are expected to remain so for some time. Consequently, financing that investors might seek to bring dollars to Argentina would be expensive.

Moreover, this country has a long history of currency crises and defaults. Argentina's country risk, the financial system's instrument to measure a state's reliability in repaying loans or investments, is high, though lower than Venezuela's, it is the highest in Latin America, on par with Bolivia's or Ecuador's, which follow it.

Will the major international banks lend to large corporations to invest in such a high-risk country? And if they do, what interest rate will they demand?

We must remember that there are nearly 200 countries in the world, and with globalization, corporations can do good business in most of them.

What reason is there to choose Argentina over any other more stable and secure place?

What we know, what can be affirmed, is that so far, Milei has only managed to take pictures with important people, but not a single dollar has come, and no investments have been committed to.

AND IF THEY COME, WILL THEY GENERATE EMPLOYMENT AND PROSPERITY?

In other words, they are very low in labor intensity.

The development of economic activities in natural resources, even on a large scale, has a characteristic: it only offers a few thousand jobs around the production center, whether in gas, oil, mining, or agriculture. It also creates some jobs in the network of suppliers of goods and services. In other words, they are very low in labor intensity.

Additionally, by their nature, they are located where the resource is. Development occurs in the area of influence.

Therefore, in the best-case scenario, there may be certain pockets of prosperity in Neuquén, Bahía Blanca, or wherever the liquefaction plant is built in the Andes, if significant mineral deposits are found, or in Catamarca if lithium extraction is developed.

Conversely, in Greater Buenos Aires, with the exchange market freed and imports opened, the current industry, small-scale, lacking proper scale, many of them old and low in technology, will be swept away by Chinese production.

CONCLUSION

This weakening of the government will facilitate the development of popular mobilizations to defend their living conditions.

From my point of view, I see no possibility that the current Argentine government, with this policy, will succeed in generating employment or pulling the country out of the current economic crisis. It is foreseeable that in the short term, the business front supporting it, which currently appears very solid, will fracture, and significant sectors will move from criticisms as heard now to open opposition.

This weakening of the government will facilitate the development of popular mobilizations to defend their living conditions.

For these struggles to have a chance of success, a new leadership must emerge to centralize and take the lead, and the population must understand that they have nothing in common with the leaders they have endured for decades and whom they do not want to see again.

Silvio Dragunsky

Lima, June 14, 2024

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