Argentina Reborn: A Tale of Two Finance Ministers

After more than a decade of stagnation, unsustainably high inflation, fiscal irresponsibility, and profound market distortions, Argentina’s newly appointed Minister of Economy forged ahead with an ambitious plan to restore currency stability, trust, and prosperity. This was evident in December 2023, when Minister Luis Caputo announced the wide-ranging reform package of the new Milei administration. In his April 2024 statement to the International Monetary Fund (IMF), Caputo reported that the government would rein in the expansion of the money supply, achieve a sustained fiscal surplus for the first time in fourteen years, and implement extensive structural reforms to stimulate productivity and trade.

In February 1991, Domingo Cavallo’s appointment to the same position can be described in a similar way. Cavallo would oversee the near-elimination of Argentina’s budget deficit alongside a comprehensive microeconomic agenda aimed, in his own words, at “reducing or eliminating distortions in goods or factor markets.” Most notably, he established a fixed exchange rate between the U.S. dollar and the Argentine peso, backing all pesos with dollar reserves and eliminating the possibility of excessive money creation. Although both scenarios have critical differences, these parallels should invite us to view the Cavallo program as a sign of where Argentina is headed today. A careful comparative analysis will reveal that the Caputo program is generally on track to achieve its objectives.

A Tale of Two Crises

Beyond their shared objectives and economic philosophies, Cavallo and Caputo began their terms under strikingly similar macroeconomic conditions. The Argentine economy displayed virtually no real GDP growth between 1979 and 1991. By 1991, the GDP per capita was just 85% of 1979 levels. Similarly, GDP growth stagnated between 2011 and 2023, resulting in a GDP per capita of 89% of 2011 levels by 2023. In both instances, prior administrations had resorted to unsustainably high deficit spending, which not only increased the country’s debt-to-GDP ratio but also fueled inflation as the money supply was expanded to finance government expenditures. During their first month in office, Cavallo and Caputo encountered monthly inflation rates of 27% and 25.5%, respectively. For perspective, the highest annual inflation rate in recent U.S. history was 9.5% in 1981, translating to an average monthly rate of 0.76%.

Perhaps the most critical difference between these cases is that the Cavallo program was implemented at the end of a hyperinflationary episode, traditionally defined by economists as a sustained period with monthly inflation rates exceeding 50%. This condition persisted throughout much of 1989 and 1990, leading to annual inflation rates of 3046% and 2078%, respectively, for those years. The social consequences of hyperinflation were catastrophic, as millions of Argentines witnessed their wages and savings evaporate. Although national poverty data from that time is limited, poverty in the capital city of Buenos Aires was estimated at 25.9% in May 1989. By October of that year, it had surged to 47.3% — an 83% increase — and would not return to pre-hyperinflation levels until late 1991.

Argentina Under Cavallo

As highlighted by a journal article from 1997, the depreciation of the Argentine currency was so drastic that it led to a de facto dollarization of the economy, as anyone who could afford to seek to replace their nearly worthless money. Furthermore, a significant portion of the money supply had already been deliberately withdrawn from circulation through a series of hectic stabilization efforts between 1989 and 1990. Ultimately, as inflation remained high but decreased from its hyperinflationary peak, poverty levels began to decline, giving then-president Carlos Saúl Menem some political flexibility. All these factors enabled Cavallo to implement the so-called “convertibility” regime very early in his tenure, backing what little national currency remained in circulation with U.S. dollar reserves. This enforced parity would send a clear signal to private actors while placing a real constraint on future monetary expansion, causing inflation to plummet.

Convertibility would only last until 2002, proving overly inflexible in the face of external shocks and incompatible with Argentina’s renewed fiscal excesses after Cavallo’s dismissal in 1996. However, its initial success had far-reaching positive consequences. Throughout the twentieth century, Argentina had never experienced eight consecutive years of cumulative GDP per capita growth greater than between 1990 and 1998.

Argentina Under Caputo

Caputo’s economic program, in contrast, was implemented before what may have been a hyperinflationary episode. Although Argentina had experienced consistent double-digit annual inflation since 2002, it was not until August 2023 that monthly inflation exceeded 12% for the first time since the early 1990s, peaking at 25.5% just four months later. Thus, none of the aforementioned factors that enabled Cavallo’s nearly immediate monetary reforms were present in December 2023.

Moreover, the Caputo program faced a significantly overvalued national currency —specifically, a larger gap between the official exchange rate, which could only be maintained through capital controls, and the exchange rate implied by informal markets. While this gap averaged 40.7% in 1989 and 5.5% in 1990, it reached 91.9% and 107.9% in 2022 and 2023, respectively. Thus, the immediate removal of pernicious capital controls at the end of 2023 would have led to a dramatic and abrupt increase in the cost of imported goods, as well as a steep decline in the value of dollar-denominated savings held by millions of Argentines. Given the self-reinforcing tendencies associated with rapid inflation, such a drastic shock could have potentially driven the country into hyperinflation, resulting in catastrophic consequences.

Indeed, Caputo closed much of this exchange rate gap in December 2023 by devaluing the peso by over 50%. As expected, this move temporarily fueled inflation and increased poverty, causing the latter to rise from 41.4% in the second half of 2023 to 52.9% in the first half of 2024. However, as the aforementioned 83% increase in poverty rates in Buenos Aires during 1989 suggests, a hyperinflationary episode would have been far more damaging. An equivalent increase in late 2023 would have pushed national poverty rates above 75% by early 2024.

Data Source: Central Bank of Argentina

Note: Author’s Analysis

With monthly data available until October 2024, it seems that the Caputo program is effectively on track to control inflation sustainably , albeit somewhat slower than the Cavallo program. While it took Cavallo two months after his appointment to reduce monthly inflation to 5.5%, Caputo took five months to reach a comparable 4.2%. In Cavallo’s case, monthly inflation continued to decline sharply, plummeting to just 0.6% after ten months. Under Caputo, inflation stabilized around 4% between the fifth and ninth months, only to begin declining again in the tenth month, dropping to 2.7% in October 2024.

Continued inflation under Caputo is largely tied to efforts to gradually close the exchange rate gap, supported by a 2% monthly peso devaluation in November 2024. This gap had decreased to just 9.7%, its lowest level since December 2019. Assuming no further setbacks occur, Caputo appears to be on track to neutralize the greatest potential source of future inflationary shocks and the most significant barrier to the liberalization of capital markets.

Looking Ahead

The government’s ability to lift these capital controls and stabilize the currency situation in the coming months may help clarify the disagreements regarding Argentina’s inflation rate in 2025. The government anticipates annual inflation to reach 18% next year, which would mark a success comparable to Cavallo’s 16% inflation in 1992. The IMF, taking a more conservative stance, predicts inflation will rise to 45% in 2025. Nonetheless, even the IMF’s estimate would signify Argentina’s lowest annual inflation rate since the COVID-19 pandemic.

More broadly, the IMF expects that Argentine incomes will recover rapidly beginning in 2025, mirroring the prosperity of the Cavallo ministry. Assuming an annual population growth rate of 0.3%, Argentina’s GDP per capita is projected to exceed 2011 levels by 2028, the fifth full year since Caputo’s appointment. For comparison, during Cavallo’s tenure, GDP per capita first surpassed the 1979 levels in 1994, his fourth year in office.

While Argentina’s economic future remains uncertain, existing evidence suggests that Caputo is likely to reach the same milestones as Cavallo, with only a slight delay and without experiencing a prior episode of hyperinflation. Such an accomplishment would be genuinely remarkable and may well lay the groundwork for a new, more productive chapter in Argentine economic history.