Javier Milei’s Chainsawing Economic Overhaul for Argentina

The anchor is not a sustainable disinflation tool

A central contradiction is what Javier Milei, Argentina’s President calls the “anchor approach": using the exchange rate, tariffs, or trade liberalization as the nominal anchor for inflation. 

How the anchor works

The idea is: open the economy, allow cheap imports in, and let external competition “discipline” domestic firms.

The hope: domestic producers stop raising prices because otherwise they lose market share. That should, in theory, bring inflation down.

The problem for domestic firms: wages, energy, and local costs don’t disappear just because the peso is “anchored.”

Argentina’s economy contracted in June for the 4th month this year, before interest rates soared in July, Graph: Bloomberg, Aug 20, 2025. 

Firms face a squeeze:

Keep prices low → margins collapse, firms run down capital and eventually shut down.

Raise prices → they lose customers to cheaper imports.

This leads to erosion of industrial capacity and “import-dependence.”

Why this is risky

In the short run, the anchor may “import” lower inflation via cheaper foreign goods.

But in the medium run:

Current account deteriorates → more imports, less competitive exports.

Industrial hollowing-out → fewer domestic firms survive.

Dependence on external financing → as soon as foreign capital inflows slow (or reserves run down), the anchor collapses.

This is the classic recipe for a currency crisis: 

overvalued exchange rate, import surge, dwindling reserves, sudden stop.

The drop in June activity aligns with a consumer spending setback in recent months as wages adjusted for inflation fell into negative territory earlier in the year, Graph: Bloomberg, Aug 12, 2025.

Historical parallels

Argentina in the 1990s (Convertibility Plan): pegging peso to dollar worked for a few years, killed inflation, but destroyed industry and ended in the 2001 collapse.

Southern Cone experiments (Chile, Uruguay, Argentina late 1970s): same “tablita” anchor, same results — a boom in imports, industrial decline, then a brutal crisis.

Bottom Line

The anchor is not a sustainable disinflation tool if it rests only on external discipline without a domestic restructuring of productivity, fiscal backing, and credible institutions. It usually buys time but ends in a crunch.

FT, Apr 14, 2025.