Milei’s Argentina shows where South America might be heading

Upcoming elections in the region could see a shift to the right, increasing the likelihood that other countries might follow Argentina in delivering painful fiscal reforms.

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Published 25 July 2025

Updated 2 October 2025 — 4 minute READ

Image — Argentina’s President Javier Milei at the Madrid Economic Forum on 8 June 2025. Photo by OSCAR DEL POZO/AFP via Getty Images.

David Lubin

Michael Klein Senior Research Fellow, Global Economy and Finance Programme

The Argentine government’s experiment with ‘chainsaw economics’ has delivered some notable successes, despite its many controversies; and its architect, President Javier Milei, remains remarkably popular heading into mid-term elections this October. 

What’s going on in Argentina illuminates two themes that have emerged in South America. One is the painfulness of the choices to be made when dealing with dysfunctional public finances. The other is the potential resurgence of the political right, with key elections taking place in Brazil, Chile, Colombia and Peru (among others) between now and late 2026.

These two themes will play out in different ways. In Chile and Peru, countries where the need for fiscal radicalism is lowest, elections may tilt to the right without any great effect on economic policy. On the other hand, in Brazil and Colombia, where public debt dynamics are more obviously unsustainable, fiscal consolidation will not merely depend on a shift to the right, but also on a Milei-like willingness to take very tough decisions.

‘Chainsaw economics’

The dysfunction of the Argentine economy is, in many ways, unique. The country is now on its 23rd IMF agreement – a number exceeded only by Pakistan – and owes the Fund over $50 billion. The cost of insuring against an Argentine default over next five years is around 8.5 per cent, way above any other countries in the region: Colombia’s is around 2 per cent, while Brazil’s is 1.5 per cent. 

Against that fragile background, Milei’s achievements are impressive. Inflation fell to 39 per cent last month, a far cry from the 290 per cent inflation rate that Argentines suffered at its peak in April 2024. And the economy is improving: after two years of recession, GDP growth could exceed 5 per cent this year. 

What lies behind this improvement in confidence is a brutal fiscal contraction that saw non-interest public spending fall by almost a third last year. This has generated a ‘primary’ budget surplus – that is, excluding interest payments – of 1.8 per cent of GDP, following a deficit of almost 3 per cent in 2023.

The result is that the central bank is no longer financing the government through money-printing. This has made room for the welcome fall in inflation, and for a sharp decline in market anxiety about the country’s macroeconomic framework.  

Not all is well, to be sure. Milei’s ‘shock therapy’ programme of quick and deep cuts to public spending has seriously eroded public services at a time when more than half of the country is living in poverty. While increases in child allowances and social spending may have softened the blow for some, cuts to healthcare and social programmes have disproportionately hit the poorest.

After two years of recession, GDP growth could exceed 5% this year. 

This aside, there are two central problems with economic policy in Argentina. The first is that a fair amount of the fiscal adjustment has depended on cuts – to public investment spending, and to provincial transfers – that won’t easily be sustained. And the second is that one of the central mechanisms Argentina has relied on to bring inflation down has been to stabilize the peso’s exchange rate, which brings down the cost of imports and thereby keeps the overall price level under control. 

But the all-too-familiar pattern in this kind of ‘exchange-rate based stabilization’ is to win low inflation at the expense of a very big rise in the trade deficit, thanks to a predictable surge in imports.  That in turn makes it difficult to accumulate foreign exchange, a huge vulnerability for a country like Argentina in which dollars are scarce to begin with. Sensing the risk of currency devaluation, Argentines have been buying dollars in growing amounts recently.

Brazil and Colombia 

While Argentina’s economy is uniquely frail, the budgetary environment in Brazil and Colombia also leaves much to be desired. These two countries share what economists call an ‘r minus g problem’, where ‘r’ – the inflation-adjusted interest rate – is greater than ‘g’, the economy’s real growth rate. When this is true, it extremely difficult to stop the government’s debt burden from rising inexorably without painful corrections to the budget.

The yield on a ten-year government bond is currently 14 per cent in Brazil, and 12 per cent in Colombia. Inflation is close to 5 per cent in both countries, ‘r’ is incredibly high, given that potential GDP growth is certainly no greater than 3 per cent in either country. 

Interest payments on government debt in Brazil are now consuming 8 per cent of GDP. That’s not quite a record – it reached 9 per cent in early 2016 during Dilma Rousseff’s financially chaotic presidency – but it’s a sign of creeping vulnerability.  

And in Colombia, the government’s recent ditching of its fiscal framework has led to sovereign rating downgrades and a loss of access to an $8 billion IMF credit line.

Brazil and Colombia have another feature in common, which is that the structure of public spending is notoriously inflexible, since in both cases some 90 per cent of government expenditure is pre-allocated by law: to pensions, wages, transfers to households and the like. This means that, without much scope to increase revenues, restoring order to public finances might well need something like ‘chainsaw economics’ down the road.

Swing to the right?

Election cycles in South America can exhibit pendulum-like characteristics. The 2021-2022 cycle produced a shift to the left, or ‘pink wave’, with victories for Chile’s Boric, Colombia’s Petro, Brazil’s Lula and Peru’s Castillo.

It is possible that the coming cycle will see the pendulum swing back to the right. In this case, market confidence about public finances in the region might strengthen as politics in the region become vaguely more Milei-like.

That said, President Trump’s decision to impose a 50 percent tariff on imports from Brazil has delivered a political gift to President Lula and correspondingly damaged the hopes of São Paulo Governor Tarcísio de Freitas, the right’s likely candidate in the election next October. 

And in Colombia, while President Petro’s popularity is down to 29 per cent, his successor’s identity remains unclear in a field of candidates that exceeds 70 in number. Although ‘Petrismo’ remains alive in the sense that there seems little support for public spending cuts, financial markets remain optimistic about a post-Petro fiscal consolidation.

Restoring order to public finances might well need something like ‘chainsaw economics’ down the road.

Ironically the South American countries least in need of fiscal adjustment seem mostly likely to shift to the right. Both the far-right and centre-right candidates are currently performing well in the polls ahead of Chile’s November election. Either would be well-placed to win if the election goes to a second-round contest against a left-wing candidate. The field for Peru’s election next April has yet to take shape but may well also produce a right-wing president.

Donald Trump can already count on the support of regional allies in Milei’s Argentina, Bukele’s El Salvador and Noboa’s Ecuador. By the end of next year he may have more friends in the region. But in some of those countries there will still be a lot of work to do to shore up confidence about public finances, and a Milei-like approach may be necessary in some cases.