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September 25, 2023

Eduardo Levy Yeyati on an Embattled Argentine Economy and Unprecedented Election

On September 25, the Georgetown Americas Institute (GAI) hosted a conversation with GAI Visiting Fellow Eduardo Levy Yeyati to discuss the many challenges facing Argentina’s embattled economy amidst an unprecedented three-way presidential race marred with uncertainty and disruptive promises of dollarization.

Eduardo Levy Yeyati speaks with students at Georgetown University’s Pedro Arrupe, S.J. Hall.
Eduardo Levy Yeyati speaks with students at Georgetown University’s Pedro Arrupe, S.J. Hall.

Argentina’s protracted economic crisis is one of the central topics in current Latin American affairs. Poverty levels have increased to an astonishing 40.1%, up 3.6% over the past 12 months. Meanwhile inflation has continued to rise, reaching 124.4% annually in September, the highest rate since 1991. This dire situation has served as the backdrop for an election in which far-right political outsider Javier Milei and his La Libertad Avanza coalition burst onto the scene, securing a slim victory in country-wide primary elections in August 2023 with promises to dollarize the economy. To discuss this challenging moment for Argentina and the road ahead, GAI hosted Eduardo Levy Yeyati, a GAI visiting fellow and dean of the School of Government at Universidad Torcuato Di Tella in Buenos Aires. 

Inflationary Woes and Promises of Reform 

Argentina has a perennial problem with inflation, and its leaders have consistently struggled to sustain extended periods of low or single-digit inflation. According to Levy Yeyati, Argentina’s divergence away from its once stable and growing economy began in the late 1940s, although for Levy Yeyati events that transpired over 60 years ago are no excuse for its contemporary lackluster economic performance.

“Bringing inflation down is actually not that difficult; the real issue is keeping it that way for the next two decades.” -Eduardo Levy Yeyati

The instability of Argentina’s macroeconomic policy is greatly to blame, as successive administrations tend to reverse their predecessors’ reforms in favor of diametrically opposed policies. This stands in the way of a sustained stabilization program that could ensure long-term growth for the country. 

“There are many hypotheses that explain why we have not been able to maintain our stability, but my question is: what do we need to do after our next macroeconomic stabilization program to keep it that way?” -Eduardo Levy Yeyati

Is Argentina unique in these challenges? Levy Yeyati believes that Argentina’s persistent redistributive struggles for limited resources are becoming more common across Latin America in places like Chile, Colombia, and Peru. As underdeveloped democracies these countries are exposed to higher volatility as different groups push vocally to steer scarce resources in their favor.

The reforms of the 1990s, which included a peg of the Argentine peso to the U.S. dollar, are a good example of this dynamic. These reforms, and the stability that came with them, led to noticeable growth for the economy, but electoral pressures led the government to incur sizable budget deficits that eventually led to the dramatic debt crisis of 2001.

Eduardo Levy Yeyati and Alejandro Werner speak with students at Georgetown University’s Pedro Arrupe, S.J. Hall.
Eduardo Levy Yeyati and Alejandro Werner speak with students at Georgetown University’s Pedro Arrupe, S.J. Hall.

The Economy in the Next Administration 

Levy Yeyati believes that as the next administration begins a new stabilization program to rein in inflation and rebalance the economy, it will also need to prioritize key areas of reform such as fiscal policy, social security, and labor policy to jumpstart the economy. If the next administration fails to do so, they are bound to quickly lose their social license for structural reforms. 

“From day one the next government needs to start adjusting fiscal policy to balance the budget and reduce inflation. There is no margin for further monetary or debt financing.” -Eduardo Levy Yeyati

Argentines are not likely to support an aggressive restructuring, however, and Levy Yeyati argues that people’s frustrations, expressed in votes for disruptive outsiders, should not be mistaken for their support of dramatic policies. 

This includes Milei’s proposed dollarization. Although it sounds appealing, it is impractical because the peso would require such a dramatic devaluation to dollarize at current market prices that people’s salaries would lose most of their value. An environment of widespread social frustration and voter apathy amid an election is not conducive to sustainable reform policies. 

“This is a grim scenario. We need all of these reforms in place within the first year of the new government. Unfortunately I believe that the chances that we will go back to hyperinflation and default are inversely proportional to the chances of a reasonable coalition winning the elections this year.” -Eduardo Levy Yeyati

The event was moderated by GAI Founding Director Alejandro Werner. A full recording of the event is available on the GAI YouTube channel.