Javier Milei cannot be accused of flattery or hiding the facts. On December 10, 2023, exactly one year ago, he ascended the steps of Argentina's National Congress in Buenos Aires, draped in the national flag like a beauty queen, and delivered his inaugural address as the new president. "There is no money," he repeatedly emphasized, making it clear that he was embarking on an economic "shock therapy" program that would come with heavy costs: "There is no alternative to austerity and shock measures. This will negatively impact activity, employment, and the number of poor and extremely poor. There will be stagflation. We know that in the short term, the situation will worsen, but soon we will see the fruits of our efforts after laying the foundations for solid and sustainable growth."
At the time of this speech, Argentina was grappling with monthly inflation of 12.8% (a 211% annual rate). The government was printing money at a frenzied pace, resulting in a budget deficit of billions and a massive trade imbalance that created a foreign currency crisis. Poverty engulfed 42% of the population, the real exchange rate of the Argentine peso against the dollar was at a record low, and the economy was sliding into recession.
Since entering the "Pink House," as Argentina's presidential residence is known, Milei has taken drastic steps: firing 30,000 public sector workers, closing 13 government ministries, cutting 13% of government expenditures, reducing taxes on foreign investments, eliminating funding for anti-poverty organizations, and privatizing state-owned enterprises. Unsurprisingly, these measures caused poverty rates to soar from 42% to 53% within six months. Pensions took a hit, median wages fell, and Argentina's economy contracted for three consecutive quarters.
This week, however, bore fruit. In the last quarter, Argentina recorded its first positive economic growth in years—3.9%. Inflation has also dropped steadily and impressively to just 2.4% monthly. While still alarming by Israeli standards, this marks an unprecedented low for Argentina in four years. Moreover, Milei managed to balance the national budget for the first time in 15 years and executed a significant currency devaluation, nearly closing the gap between the official and black-market exchange rates—crucial for curbing dollar flight from the country.
Meanwhile, the markets are responding positively. The International Monetary Fund (IMF) projects 5% growth for Argentina next year. Foreign investments are flowing in, boosting the local stock exchange, and the country's risk premium has dropped significantly. Real wages are on the rise, recently closing the gap that opened when Milei assumed office. Updated poverty rates will only be released in a few months, providing a clearer picture of whether the macroeconomic improvements are translating into real benefits for the average citizen.
It's the housing market, stupid
It's important to note that economic growth figures include government expenditures. For instance, during the recent conflict, Israel's economy contracted only slightly due to an 88% increase in public spending on the military and aid to the north and south. Naturally, Milei's sharp cuts in government spending initially dragged down Argentina's growth metrics. However, the positive growth reported in the last quarter is promising because it stems primarily from increased private consumption and capital investments.
Economic reporting often overlooks these nuances, treating growth data simplistically without analyzing its components. This oversight was highlighted by American economist Robert Solow in the 1960s, when he debunked doomsday predictions that the Soviet Union's economy was outpacing the US by pointing to the superficial nature of such growth comparisons.
In Israel, too, since the onset of the war, reports have focused on declining investments without delving into their specific origins. This discourse, often driven by political convenience, tends to tie investment declines to the tech sector or government policies. But a closer look at the data reveals the central issue lies elsewhere—residential real estate.
Yes, headlines noted that the economy has lost around 60 billion shekels in investments since the war began. However, the fine print reveals that most of this sum comes from a decline in the housing market, particularly residential real estate. When we discuss "investments in the economy," we often refer to structures, which might not align with the public's mental image.
For example, in 2023, total fixed asset investments in Israel amounted to 459 billion shekels, more than half of which was allocated to buildings. This total was split roughly equally between residential and commercial properties. Most of the drop in construction investments since the war—about 30%—has occurred in the housing sector.
This decline is not due to an ideological boycott by housing developers but rather the acute labor shortage in the construction industry. Since October 7, the sector has been grappling with a persistent lack of tens of thousands of workers, exacerbated by the government's failure to provide alternatives to Palestinian laborers. This paralysis has stalled numerous projects, a cost all Israelis will bear for years to come.
While politicians endlessly discuss "growth engines," actionable decisions capable of injecting tens of billions of shekels into the economy are waiting beneath their noses. The term "growth engines" has become a cliché, often misused to justify wasteful or highly sectoral budgets.
It's too early to draw definitive conclusions about the political alien Javier Milei's economic experiment. But there is one lesson Israeli politicians could learn from him: rather than promising a rose garden, be honest with your voters. Prepare them to endure hardship by clearly explaining how it will benefit them in the long run. This requires a standard of transparency and a deeper understanding of growth components—practices uncommon in Israel but undeniably rewarding.
Indeed, throughout the past year, even as poverty rates surged, Milei maintained stable public support of 46–48%. In recent months, as successes began to materialize, his popularity has soared to 54%.
