After assuming the presidency of Argentina, Javier Milei – the first economist to lead the country – gave a speech from the steps of Congress in which he made a harsh diagnosis of the local economy and warned that he would make a drastic cut in public spending that would generate ” stagflation.”
“There is no alternative to adjustment and there is no alternative to shock. Naturally, this will have a negative impact on the level of activity, employment, real wages, the number of poor and indigent people,” he noted during his first message as head of state.
“There will be stagflationit is true, but it is not something very different from what has happened in the last 12 years,” he stated.
What is stagflation and why has Argentina been suffering from it for so long, according to Milei?
It is a word that combines high inflation with economic stagnation. And it usually causes increasing unemployment.
The term is a translation of the English concept “stagflation“, which was coined in the 1960s when the phenomenon impacted the British economy.
It is considered by specialists as a difficult challenge to solve given that the cost of living becomes more expensive and at the same time there is no growth, so its effects are devastating.
On the other hand, policies to overcome stagnation tend to exacerbate inflation.
This is what Milei warned, who pointed out to his militants in the Plaza de Mayo that “In the short term the situation will worsen”.
However, the new president assured that his formula to solve the problem – a profound adjustment – will be “andThe last bad drink to begin the reconstruction of Argentina”.
“Then we will see the fruits of our efforts, having created the foundations for solid and sustainable growth over time,” he stated.
The new president also highlighted that in reality the country has been suffering from stagflation since 2011, since since then the Gross Domestic Product (GDP) per capita “has fallen 15% in a context where we have accumulated 5,000% of inflation.”
“Therefore, We have been living in stagflation for more than a decade.”he explained.
“An orderly adjustment”
During his speech, Milei listed the economic difficulties he receives from the outgoing government, headed by Alberto Fernández and Cristina Fernández de Kirchner, and which – in his opinion – represent the worst inheritance in Argentine history.
The biggest obstacle, he said, is the fiscal and external deficit which are equivalent to 17 points of GDP.
“Therefore, there is no viable solution that avoids attacking the fiscal deficit,” he clarified, before explaining that his plan is cut 5 points from public spending and stop the issuance of money, “the only cause of inflation that is empirically certain and valid in theoretical terms.”
Milei promised that it will be “a neat fit and let it fall with all its force on the State and not on the private sector”.
“We know it will be hard,” he added, quoting a phrase from former president Julio Argentino Roca.
“Nothing great, nothing stable and lasting is achieved in the world when it comes to the freedom of men and the gratitude of people if it is not at the cost of supreme efforts and painful sacrifices”.
Milei’s critics warn that his policies will affect one of the few “positive” indices that Argentina has: unemployment ratewhich, according to the most recent data (from the second quarter of 2023), is 6.2%one of the records lowest in its history.
Many fear that the stagflation predicted by Milei will dramatically increase those levels.
The memory of what was the worst crisis in Argentine history is still fresh, two decades ago, when unemployment reached its maximum record, 24.1%.
However, supporters of the new government highlight that the current employment rate hides another reality: although there is employment, salaries are so low that a third of workers today are poorthey highlight, something that has never happened before in this country.