A street artist is painting on a canvas of pesos. Families are taking handfuls of money to the grocery store, just to encounter confusion about the price of groceries. In Argentina, runaway inflation has dire consequences—the treasury issued a 2,000 peso note just to keep up. Chronic economic mismanagement by the government has forced Argentine citizens to cope with the harsh realities of a spiraling currency.
2022 saw Argentina’s prices soar by 95 percent; while many countries struggled with inflation due to supply chain issues and the war in Ukraine, Argentina’s struggles are long-standing due to its history of economic mismanagement. By cutting energy subsidies and reducing welfare spending, Argentina could reign in its runaway inflation problem.
Understanding Argentina’s inflation problem requires understanding the presidency of Juan Perón. As Minister of Labor, Perón fought for popular issues that workers cared about, such as improved working conditions, increased access to education, and expanded social benefits. In 1946, he used this track record to rise to the power of the presidency. To fulfill his campaign promises, Perón redesigned the Argentine Constitution to enshrine people’s social rights. He also strengthened Argentina’s economic development by nationalizing education and transportation. However, in addition to these positive advances, Perón also initiated the nation’s reliance on a bloated welfare system that compounds fiscal problems. While good-intentioned and initially beneficial, this widely-distributed provision of public goods has done great harm in the long run.
Perón fathered the welfare state in Argentina, and it continued after he was ousted in 1955. The Revolución Libertadora, a nationalist Catholic group that assumed power, changed the Constitution to include social security as a right for the Argentine public. While Perón no longer held power, his political ideology, peronismo, continued to grip the region. To this day, peronism continues to embroil Argentina in economic crises, leaving the country more susceptible to outside influences.
Runaway government spending is to blame for most of Argentina’s economic crises in the past 35 years, and, even when it is not a direct cause, it still exacerbates the effects of other catalysts. For example, as Russian energy becomes harder to access due to the war in Ukraine, countries like Argentina disproportionately suffer from the increased cost. When the government runs on a budget deficit, it can either take loans from the International Monetary Fund (IMF), creating more debt in the long run, or print more money, increasing inflation.
It is no surprise that, given Argentina’s history of government spending, it also has a long history of inflation. In 1991, Argentina recorded inflation of 84 percent under President Carlos Menem. In response, Menem proposed a convertibility plan, which relied on fixing the value of the peso to that of the US dollar–the idea being to tie the weak currency to a strong one. While inflation went down over the first couple years of this plan, unemployment also rose as more people attempted to join the workforce. Ultimately, the plan was abandoned in 1998 due to an economic crisis that came from increasing foreign debt payments; Argentina continuously accepted loans from foreign powers and the IMF with no plan of how to finance the repayment. Economic crises like these are not uncommon in Argentina, and they have a deep political history.
Argentina’s lengthy social services bill has often led them to take IMF loans in order to remain financially stable. Many Argentine politicians have complained about these loans, claiming that the IMF’s conditional lending structure is predatory. Nevertheless, high social spending has forced the government to rely on them: Since joining the IMF, the nation has received funds for 22 financial support programs. It recently took out a $44 billion loan, despite still owing the Fund $40 billion from 2018. This irresponsible borrowing and spending could easily result in a default like the country saw in 2001, which resulted in all foreign investment leaving the country for two years.
So, what should Argentina do? Are they doomed to forever repeat this cycle of government overspending and economic crisis?
The Argentine government has begun reacting to inflation with a series of policies, such as raising interest rates. But solely focusing on this current economic crisis misses the point; these crises stem from an institutional problem in Argentina. Trimming the bloated welfare system is necessary to help fix runaway government spending, but no politician has the political will to do it. While people who need welfare to survive should retain their services, others should be phased out of the programs. For instance, public transportation subsidies are a prime example of a slashable cost.
Argentina should also slash energy subsidies. Energy markets have become increasingly expensive as the war in Ukraine continues, a problem which is compounded in a country like Argentina that has some of the highest energy subsidies in the world. The average Argentine citizen only pays around $5 per month for electricity while a US citizen pays $115. Helping to create leaner economic policy can start with moves like phasing out these subsidies. If the government continues to subsidize programs that aren’t means-tested, it will end up harming its citizens by continuing to rely on policies, like printing money, that exacerbate its economic problems.
Without drastic measures to combat government spending, Argentina will continue to face economic crises. Spending public money on people who don’t need it ultimately hurts Argentines more than the bloated welfare system helps them. To solve Argentina’s pattern of economic ruin each decade, its leaders must right the ship by making unpopular—but necessary—cuts to social programs and energy subsidies.