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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is professor of economics at Boston University
Since taking office in December 2023, Argentina’s President Javier Milei has been true to his word. He’s taken a chainsaw to excessive state spending, eliminated mountains of anti-competitive regulations, and shuttered the peso printing press. The economy is now growing at 6 per cent, the government is running a budget surplus and inflation is down around 85 per cent.
Yet, past performance doesn’t guarantee future results, especially in Argentina. In 1929, the country ranked seventh in the world in per capita GDP. Today it ranks 88th. Thanks to its terrible credit history, Argentina faces a sky-high borrowing rate in trying to get back on its feet.
Since borrowing is unaffordable and printing pesos could reignite hyperinflation, the government is operating hand-to-mouth. Yes, US President Donald Trump has ridden to the rescue, pledging, in the words of Treasury secretary Scott Bessent, to “do whatever it takes”. Unfortunately, what’s needed for sustained growth goes far beyond a $20bn swap agreement. Argentina lives day by day on credibility. A major run on the peso will sink the country’s future.
Milei plans to sequence labour market and tax reform while gradually dollarising. Slow and steady is prudent in most countries. But in politically and economically volatile Argentina, it’s surely too little too late. Here, then, is a Maga plan to make Argentina grow again that both presidents will surely love.
The US would transform its $20bn defend-the-peso loan into a $30bn non-recourse dollarisation loan. A non-recourse loan entails no repayment if its conditions are met. Argentina would use the loan to immediately dollarise as well as enact five fundamental reforms.
The first is adoption of 100 per cent, equity-financed, mutual fund banking. This limited-purpose banking (LPB) restricts banks to fulfilling their purpose — financial intermediation. Equity finance means zero debt, and with no debt, Argentine banks can never fail. Consequently, the government would never again need to print money to stave off financial collapse.
The LPB payment system would work via cash mutual funds that hold one asset only, cash, held in reserve at the central bank. This aspect of LPB is what the economist Henry Simons called full reserve banking, which Milei advocates.
A new government agency would verify and publicly disclose, in real time, all assets held by all mutual funds. This will make the shares of funds which would hold mortgages, business loans and other illiquid assets highly liquid on the secondary market.
Imagine Argentina having the safest banking system in the world. Its joint dollarisation/LPB model would spread globally. Countries would line up to dollarise.
The second reform would retire Argentina’s insolvent, take-as-you-go pension system. Under this scheme, the government would pay off, as they come due, benefits accrued under the current system. But it prohibits further benefit accrual. Over time, aggregate benefits under the existing system, as well as the payroll taxes needed to pay them, would head to zero. The 27 per cent payroll tax rate would be cut immediately to 20 per cent. This would leave workers enough cash flow to contribute to their personal security accounts (PSAs).
Workers would be required to contribute 10 per cent of their pay to their PSA accounts. The government would make matching contributions for low-wage workers, the unemployed and the disabled. As each birth cohort approaches retirement, its PSA balances would be gradually converted into inflation-indexed bonds and used to provide real annuities in proportion to one’s retirement balance.
Argentina tried privatising its state pension before, only to have the state confiscate workers’ assets. To prevent this, PSAs would be placed under the custody and trusteeship of the World Bank and fully owned by Argentine workers.
Reforming pensions would facilitate the third and fourth conditions of a US loan: requiring electronic purchases and sales to track and so reduce the size of the informal economy, and then rationalising the federal and provincial tax systems to ensure all Argentines have strong incentives to work and save.
The fifth and final condition would be to require Argentina to do long-term fiscal gap accounting, which compares the present value of all projected future outlays with the present value of all projected future receipts. This would document Argentina’s ability to pay its bills over time.
Taken together, these reforms would dramatically lower Argentina’s country risk, letting it borrow from abroad at an affordable rate. That is another key to rapid growth.
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