Insights from Argentina: How a libertarian might lead South Africa – Katzenellenbogen

In Argentina, radical libertarian Javier Milei assumed the presidency, pledging shock therapy to reduce government intervention. His agenda includes privatisation, deregulation, and adopting the dollar to combat hyperinflation. South Africa, facing economic challenges, could draw lessons from this. The elections of Milei and Brazil’s Bolsonaro reflect a demand for fresh solutions during crises. South Africa’s economic woes may pave the way for voters to consider free-market policies, mirroring Milei’s transformative efforts amid challenges and potential opposition.

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Lessons from Argentina: What if a libertarian becomes President of South Africa?

By Jonathan Katzenellenbogen*

In Argentina, Javier Milei, a radical libertarian who promised shock therapy to severely cut the role of the government, was recently inaugurated as President.

Milei is a political outsider, and aims to take on vested interests and undo years of an expanding state that is behind dangerously high public debt and hyperinflation. He campaigned on privatising state-owned companies, including the state airline, media and energy giants, cutting the number of government ministries, deregulating the economy, easing labour laws, and adopting the dollar as a currency to end hyperinflation.

If a libertarian does become President of South Africa, there are some key lessons from the Milei experience so far.

The elections of both Milei and Jair Bolsonaro in Brazil, who was President from 2019 to 2022, were mostly a reflection of people voting for fresh solutions in the face of a crisis. That could easily happen in South Africa, not in the elections later this year, but possibly in five years’ time, particularly if economic conditions continue to worsen.

In last year’s presidential election, voters gave Milei 56 percent of the vote, amounting to an 11 percentage point margin over his rival, who favoured continuing to pursue the Peronist orthodoxy of a big state. In an economic crisis, many more voters tend to favour alternatives to what has been tried before. Both Milei and the former Brazilian President, Jair Bolsonaro, who ruled from 2019 to 2022, came to power during economic crises. Argentina is in a deep economic crisis with inflation at more than 160 percent in November last year, and now pushing toward 200 percent. There is also rising economic hardship and excessive state borrowing. Foreign exchange reserves are almost depleted.

The South African economy is in crisis, with barely any growth, a rising government budget deficit and debt, and high unemployment. Our consumer inflation rate is 5.5 percent, which is very manageable and not close to that of Argentina, but price rises have eroded living standards since the end of the Covid-19 pandemic. If government spending and borrowing cannot be slowed down, we could end up in a financial crisis, with much higher inflation. There are large downside risks for the South African economy. So, the basic conditions for the voters to begin looking at new free-market policies could soon be in place.

Argentina and Brazil are emerging market economies, and are comparable in some ways to South Africa. The three countries have a history of a large government hand in the economy, in industrial ownership, regulation and in the provision of welfare. In some respects, Argentina with its long history of Peronism, the Brazilian generals, and the Nationalist Party were similar. Successor governments: the left in Brazil, those following a Peronist leaning in Argentina, and the ANC have also seen a large role for government in the economy.

In Argentina, Peronism has long outlived General Juan Peron, who came to power in 1946. Peronism has been called both left- and right-wing, but its key tenets have been holding on to state enterprises, attempting to develop industry behind high tariff barriers and creating a social safety net. Milei defeated a Peronist in the election, and it is from the unions, civil servants, and those dependent on the state that he will face opposition.

Although he has been in office just over a month, Milei’s entire programme might now be threatened by his lack of support in the Argentine Congress, and by opposition from the unions and the verdict of the courts. The lack of political experience in his team, who have never been in government before, could also thwart the implementation of his programme.

There is also the problem that Milei admits, according to the Spanish newspaper, El Pais, that over two-thirds of the benefits will only be evident in 15 years’ time. For mammoth reform efforts, there are often only a few quick benefits, which means support for these programmes may rapidly unravel during the hardship phase.

He promised to remake the Argentinian economy “with shock and without gradualism.” But Milei’s party only has a 15 percent share in the lower house and ten percent in the Senate, and although it has allies, that will make passing the reforms difficult. He has had to slowly cut back on some of his campaign ambitions like dollarisation, which would have brought an end to hyperinflation, and also meant no role for the central bank. Dollarisation has been adopted by Argentina before, but with foreign exchange reserves depleted, many are worried about the rate at which they will receive dollars in exchange for their pesos. His biggest priority is ending hyperinflation and that will have to mean curtailing the central bank’s deficits, and therefore deep cuts to public spending.

Union leaders have said they will fight him over plans to privatise the national airline by giving shares to the workers and ending state bailouts. Clearly, the unions would prefer to have continued bailouts, rather than a shareholding in what is now a loss-making enterprise, which would probably require deep job cuts in the event of privatisation.

To initiate his programme, Milei issued a wide-ranging 300-page Presidential Decree. The decree abolished major regulations so as to free up the housing rental market, exports, land ownership, food retailing, and the labour market. There were also reductions in employee severance packages and extensions in the probationary period for new employees laid down in the decree. But the courts rejected changes in these regulations.

His use of a Decree to implement reform will be challenged, as these can only be used in ‘urgent and necessary circumstances’. That might force him to try putting through more in legislation, but this could then be scrapped in the Congress.

He has managed to do an about-face in Argentina’s foreign policy. He has decided that Argentina will not join the BRICS grouping, and will give diplomatic support to Israel.

There are definite advantages to a newly-elected government with a strong mandate using shock therapy early and with speed. But it needs to have the necessary support. In a political system such as Argentina, where a President is elected separately from the legislature, there are checks and balances, and it is difficult to undertake large and ambitious reforms. In South Africa, the President is elected by a majority in Parliament. Therefore, we might not face the sort of opposition in a legislature that Milei is facing. But the unions and civil servants, long supporters of the ANC, could provide the opposition.

To retain support, any reform programme needs to yield most of its benefits sooner rather than later. Austerity from cuts in spending and lay-offs cannot last long if the government is to be re-elected. A new government might scrap the entire package of reforms, ending much of the good work.

In the worst case, a few of the measures undertaken by Milei will stick, and he will at least have started the reform process.

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Jonathan Katzenellenbogen* is a Johannesburg-based freelance financial journalist.

This article was first published by Daily Friend and is republished with permission

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