Argentina Exits Recession: Have Milei’s Reforms Worked?

this video was brought to you by brilliant on Friday Argentina's statistical Authority announced that the country's economy had grown in May with GDP Rising by 1.3% compared to April or 2.3% compared to a year ago this was a pretty incredible achievement not only because it was well above the 0.1% forecast by analysts but also because it represents an annualized growth rate of 177% and it was the first expansion since Javier melee became president in December so in this video we're going to take a look at Argentina's return to growth how it fits into melee's economic plans more widely and what this might mean going [Music] forward before we start if you haven't already please consider subscribing and ringing the bell to stay in the loop and be notified when we release new videos so to understand why this number is so great for melee you need to understand how he thinks about Argentina's economy and how he wants it to change now this is a bit of a simplification but broadly speaking there are four components to GDP domestic consumption I.E people buying and consuming stuff net exports I.E the value of your exports minus the value of your Imports investment and government spending now generally economists think that an economy's GDP should include a bit of all of these things and this is what the IMF and other e economists mean when they talk about balanced growth or conversely when they warn about unbalanced growth the best example of unbalanced growth is probably China where growth is dominated by net exports while consumption only accounts for a tiny fraction and the US has sort of the opposite problem in that GDP is dominated by domestic consumption anyway Argentina is a bit more like the US in this respect than China in that at least to M's mind too much of it GDP is composed of consumption and government spending and this has in turn forced Argentina to borrow too much because argentinians consume quite a lot of stuff at least in relative terms this means that they run a current account deficit I.E Argentina reliably Imports more than it exports because export earnings don't cover the import Bill Argentinian households and companies have to borrow money from foreign investors to cover this difference similarly because the government is spending more than it receives in tax revenues it has to borrow to make up the difference and so regularly runs a fiscal deficit the government also implicitly facilitates the current account deficit by doing things like defending the peso to make it more valuable than it would naturally be the government does this by spending foreign currency to artificially inflate the peso's value thereby allowing argentinians to import more than they would otherwise be able to while simultaneously making its exports less competitive anyway the TDR is that at least in melee's eyes Argentina's GDP leans to heavily on consumption and government spending which is why the country usually runs so-called twin deficits I.E a current account deficit and a fiscal deficit to balance out both of these deficits melee immediately cut government spending and devalued the peso by 50% now devaluing the peso meant the argentinians couldn't buy as many Imports and simultaneously made Argentinian exports more competitive M then began trying to unify Argentina's complicated currency regimes for context Argentina currently has basically two exchange rates the official exchange rate claimed by the government and the unofficial or actual rate known as the blue rate which is basically always lower than the official rate before melee took charge for instance the official rate was about $370 to the doll while The Unofficial rate was about ,000 to the dollar to unify these two rates in December melee cut the official rate to $800 to the dollar and said that he'd devalue it by a further 2% every month until it matches the unofficial rate now a unified currency is just generally better for an economy but melee hoped that by dramatically simplifying Argentina's currency regime he'd also be able to stimulate investment because investors would feel more confident investing in a country with a normal currency regime anyway you get get the idea melee was trying to rebalance Argentina's economy away from consumption and government spending and towards net exports and investment however this rebalancing was never going to be immediate which is why his policies originally pushed Argentina into a deep recession as consumption and government spending fell dramatically without an accompanying rise in exports or investment Argentina's GDP duly fell every month after melee took charge in December and in the first quart of this year Argentina posted an 8% contraction year on year nonetheless melee was apparently undeterred and last month started promising argentinians a quote v-shaped recovery that would apparently be driven by exports and Investments and well at first glance it looks like that's exactly what's happened given the impressive growth we just saw in May however this number probably paints too Rosy a picture while exports are indeed up a fair bit the dayro investment is a bit murkier and most of last month's growth was driven by the agricultural sector which more than double production compared to last year when Argentina was struck by a brutal drought most other Industries including construction manufacturing and Retail actually saw declines which suggests that the economic recovery is dangerously narrow not the sort of balanced growth melee might have been hoping for perhaps the main problem for melee at the moment is the fact The peso's Unofficial rate is devaluing at a faster rate than the official rate which as we mentioned a few seconds ago is now being pushed down by 2% every month melee apparently thought that the peso would strengthen once he cut government spending because under his analysis the main cause of peso weakness was the fact that the central bank was printing money to facilitate this government spending however this hasn't happened and the peso's black market rate known as the blue rate has actually been falling at a rapid Pace between just may and July the blue peso lost 30% of its value going from about ,000 of the dollar up to about $1,400 to the dollar this is obviously a lot faster than the government's 2% monthly crawling Peg which means that the distance between the peso's official rate and unofficial rate is actually increasing not decreasing this really scuppers melee's plan to unify the two rates in order to encourage investment but the obvious solution to protect the peso's market rate I.E raising interest rates isn't really open to melee either that's in part because High interest rates would probably push Argentina back into recession but also because as we've mentioned in other videos the Argentinian Treasury and Central Bank both have so many interest link short-term liabilities that a higher interest rate would actually inject more money into the economy potentially stoking inflation yet further it's interesting that even as people ostensibly into Politics the dodr team spends more and more time analyzing data and economic information as it becomes increasingly critical but as a bunch of people who are ordinarily more focused on Words than numbers we've really benefited from courses on brilliant.org in order to keep ourselves sharp that's because brilliant is the best way to learn maths and computer science in a fun and interactive way from foundational and advanced maths to AI data science neural networks decision making and more with new lessons added monthly even if you like us don't necessarily think of yourself as a traditionally stem kind of person these courses could prove incredibly useful for your life and career in fact brilliant recently launched a ton of new content in data all of which uses real world data to train you to see Trends and make better informed decisions when it comes to our 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