During his inaugural year as Argentina’s president, Javier Milei has waged a contentious but largely successful campaign against inflation. Now, Argentines are receiving more encouraging news: the economy is growing again.

On July 18, Bloomberg reported a surprising uptick in economic activity. “Economic activity rose 1.3 percent from April, above the 0.1 percent median estimate from analysts in a Bloomberg survey and the first month of growth since Milei’s term began in December,” the outlet noted. “From a year ago, the proxy for gross domestic product grew 2.3 percent.”

This positive economic report, based on data from the Argentine government, has taken many by surprise. The 2.3 percent year-over-year increase defied expectations of a decline of similar magnitude, a prediction grounded in the International Monetary Fund’s projection that Argentina’s economy would see the least growth of any country in the world in 2024.

While the numbers are undoubtedly encouraging, economists caution that the country’s economy is far from being out of the woods. Javier Milei took office in December 2023, facing one of the most severe economic crises in Argentina’s history. Decades of mismanagement and populist policies had left the nation in dire straits. When Milei, a self-described anarcho-capitalist, assumed the presidency, Argentina was grappling with the world’s third-highest inflation rate—an astounding 211 percent year-over-year. The poverty rate was over 40 percent, and the economy was in a steep decline.

Milei proposed a radical series of economic reforms, dubbed “shock therapy,” aimed at reversing the country’s economic trajectory. His plan focused on three main components: slashing government spending, cutting bureaucracy, and devaluing the peso.

Critics were quick to warn that these measures would be disastrous. Many assumed that Milei’s remedies would deepen Argentina’s recession rather than alleviate it. Alejandro Werner, former head of the International Monetary Fund’s Western Hemisphere Department, acknowledged that Milei’s strategy could tame inflation, but warned that it would come at a significant cost.

“A deep recession will also take place,” Werner wrote, “as the fiscal consolidation kicks in and as the decline in household income depresses consumption and uncertainty weighs on investment.”

Felix Salmon, chief financial correspondent at Axios, compared Milei’s policies to “a wrecking ball,” predicting that his budget cuts would cause a plunge in household income and precipitate a deep recession.

Despite the dire warnings, Milei moved forward with his shock therapy plan within the first few months of his presidency. Tens of thousands of state workers were laid off, and more than half of government ministries were eliminated, including the Ministry of Culture and the Ministries of Labor, Social Development, Health, and Education—institutions Milei dismissed as “the Ministry of Indoctrination.” Numerous government subsidies were axed, and the peso was devalued by 50 percent.

These measures sparked immediate backlash. Critics argued that the reforms were pushing more Argentines into poverty. Journalist Lautaro Grinspan, writing in Foreign Policy in early March, claimed that “shock therapy is pushing more people into poverty,” citing a government report showing a roughly 50 percent increase in food prices.

However, it’s worth noting that the data Grinspan cited were from December 2023, before Milei had even assumed office. This has led to questions about the accuracy and fairness of some criticisms.

Surprising Results

Contrary to the dire predictions, the results of Milei’s policies have been better than many anticipated. During the first half of 2024, inflation cooled for five consecutive months in Argentina, according to the Associated Press. Though consumer prices were up 4.6 percent in June from the previous month, this was a significant improvement from the 25 percent month-over-month increase in December, when monthly inflation peaked.

In February 2024, the government reported its first budget surplus in over a decade. More recently, an economic report highlighted a substantial decline in poverty levels.

These successes have surprised many, particularly given the widespread belief that wringing inflation out of the economy and slashing government spending would inevitably deepen Argentina’s recession.

The latest economic data suggest that, contrary to expectations, Argentina’s economy may be on the path to recovery. “Argentina is officially out of recession after 7 months of Javier Milei’s economic reforms,” tweeted Daniel Di Martino, a University of Columbia PhD student. He noted that the country had been in recession since mid-2023, well before Milei took office.

Despite the positive indicators, some experts urge caution. Nicolás Cachanosky, a native of Argentina and Associate Professor of Economics at the University of Texas at El Paso, warns against declaring victory too soon. “I would be careful of claiming ‘out of the recession,’” Cachanosky said in an interview. “Maybe the Argentine economy is getting out of a recession. Maybe not. All I’m saying is that it is too early to confirm, given these numbers.”

Cachanosky points out that interannual figures can be misleading and that the data are relative values rather than true growth rates. While it remains unclear where Argentina’s economy is headed, it’s worth exploring why so many economists doubted that it could be growing again already.

Why Were So Many Skeptical?

There are two primary reasons why experts doubted the possibility of Argentina’s economic recovery under Milei’s shock therapy. The first reason is a legitimate concern about the short-term pain that often accompanies sharp reductions in government spending.

“The government spends a bunch of money and keeps people employed,” an economist I spoke with explained. “When that slows down, you’re going to be able to measure the impact of that.”

Indeed, many free-market economists expressed doubts that Argentina had already escaped recession. Cutting tens of thousands of jobs and slashing hundreds of millions in subsidies is bound to impact economic activity. While the long-term effects may be positive, as resources are allocated more efficiently, it’s not unreasonable to expect some initial economic pain.

The second reason for skepticism stems from a misunderstanding of economics, particularly within the Keynesian school of thought. Keynesians believe that government spending is crucial for economic growth, especially during a recession. This perspective argues that when economic conditions deteriorate, government intervention is necessary to stimulate demand and prevent a deeper downturn.

The idea that Argentina would slash government spending during a recession contradicts Keynesian orthodoxy. In a world where government spending increases are seen as the perfect solution to battling recessions, Milei’s approach of cutting government outlays is a bold and unconventional move.

Flaws of Keynesian Economics

A study from the Mercatus Center, titled “The Trouble with Keynesian Stimulus Spending,” highlights the problems with Keynesian economics. Authors Tony Caporale and Marc Poitras argue that Keynesian stimulus schemes fail to account for significant costs, including the inherent waste in government spending and the economic distortions created by taxation.

This criticism echoes the insights of 19th-century economist Frédéric Bastiat, who warned against focusing solely on the immediate benefits of government spending while ignoring the unseen costs. Bastiat’s famous “broken window” parable illustrates the flawed logic of Keynesian economics. The parable tells the story of a boy who breaks a baker’s window, prompting onlookers to argue that the repair job will stimulate economic activity. However, Bastiat urges readers to consider what the baker could have done with the money if he hadn’t needed to repair the window.

In the context of Argentina’s economic recovery, critics of Milei’s policies were focusing on the immediate, visible costs of his cuts—lost jobs and reduced spending—while ignoring the potential long-term benefits of a leaner, more efficient government.

Whether Argentina’s burst in economic activity in May marks the beginning of a sustained recovery or a temporary blip remains to be seen. Data indicate a sharp increase in agricultural production, which could be attributed to favorable seasonal conditions or other factors.

Nevertheless, it’s clear that Milei’s approach is a gamble, one that challenges conventional economic wisdom. After decades of economic mismanagement, Argentina is in uncharted territory. Yet Milei appears committed to his vision of a smaller, more efficient government and a stable currency, even if it means enduring short-term pain.

In the words of Adam Smith, the formula for prosperity is surprisingly simple: “peace, easy taxes, and a tolerable administration of justice.” Milei seems to understand this, and he is showing no signs of relenting in his campaign to crush inflation and cut government spending in order to return Argentina to prosperity.

As Milei himself told the BBC, “What [is] the alternative? To continue to print money like the previous administration that generates inflation and ends up affecting the most vulnerable?”

Argentina’s future remains uncertain, but one thing is clear: under Milei’s leadership, the country is taking bold steps to chart a new economic course. Whether this path leads to long-term recovery or further turmoil will be the ultimate test of his presidency. For now, the signs of economic life are a welcome change in a country that has known little but economic despair for far too long.