Argentina and Türkiye: a tale of two adjustments

Milei and Erdoğan take contrasting approaches to economic problems

Financial fragility among emerging economies these days is mostly found among the poorest, notably across sub-Saharan Africa. That said, Türkiye and Argentina, two relatively wealthy developing countries, have bucked this trend: both economies have been characterised in recent years by a persistent malaise that has triggered vast outflows of capital, very large currency depreciations and inflation at intolerably high rates, with all the misery that entails.

Yet both countries now have governments determined to clean up their economic mess, though each has chosen different paths towards stabilisation: ‘shock therapy’ in Argentina under its new President Javier Milei, and ‘gradualism’ under President Recep Tayyip Erdoğan in Türkiye.

Success is far from assured in either country. But for a raft of reasons, it is Türkiye that has the best chance of improvement. That’s not because gradualism is inherently more reliable than shock therapy; but rather because Türkiye’s problems are shallower than Argentina’s, and because the domestic politics and the geopolitics around Türkiye’s stabilisation seem more promising.

Monetary versus fiscal problems

Just as there are different ways of getting out of economic trouble, there are different ways of getting into it. In Türkiye’s case, the original sin is, mostly, rotten monetary policy. Argentina’s is more a case of persistent fiscal incontinence.

Türkiye’s monetary policy problem famously lies in Erdoğan’s claim that high interest rates cause inflation rather than prevent it. More than 10 years of insistence on this frankly absurd view helped drain the central bank of its credibility, a problem reinforced by a revolving door in the governor’s office: Türkiye has had six governors in the past 10 years.

Since the Turkish central bank’s policy interest rate has mostly been lower than the inflation rate during this period, trust in the currency has progressively collapsed. The result is that the lira’s value against other currencies is around half what it was 10 years ago in real terms and Türkiye’s foreign reserves are negative: the central bank owes more dollars than it owns.

Argentina’s original sin is less monetary and more fiscal. While Türkiye’s public debt stock has remained below 40% of gross domestic product during the past 10 years, Argentina’s doubled from around 40% in 2012 to 85% in 2022.

But what started as a fiscal problem in Argentina has ended as a monetary one. With markets rather unwilling to finance the government’s deficit, the central bank has printed money to fund it. The result: inflation was 160% in November and, like Türkiye, the central bank’s net foreign reserves have been negative since the middle of last year.

Türkiye moves slowly while Argentina aims to shock

After winning re-election in May last year, Erdoğan has brought back his former finance minister, Mehmet Şimşek , a policy-maker with a reputation for competence among market participants. He has appointed a new central bank governor, Hafize Gaye Erkan, as a way of signalling a commitment to orthodox economic policy.

Their approach is undeniably gradualist. When Erkan took over at the central bank, the policy rate was 8.5% and inflation was running at 40%. Rather than move dramatically to make it more attractive to own Turkish lira, she has moved slowly. While the policy rate has now been raised to 42.5%, it remains at a level way lower than the current inflation rate of 65%, and only roughly at the level of inflation expectations for this year.

Gradualism is also evident in Turkish fiscal policy, where the central government’s deficit is only scheduled to start falling in 2025.

By contrast, newly elected Milei seems more inclined to revolution, not evolution. The shock therapy now being administered in Argentina carries the spirit of similar efforts – in Russia, Poland and in Argentina itself – in decades past, especially the 1990s.

The treatment includes a large devaluation of the exchange rate, very large cuts in public spending, a freeing of prices, an end to import controls and a determination to shrink the state by eliminating ministries, de-regulating economic activity and selling off state-owned enterprises. This will start with Argentina’s airline, but will later include rail, media, water and YPF, the oil company.

Whether shock therapy works better than gradualism is a question that keeps social scientists busy, but it’s likely that there is no inherent advantage in either strategy. Milei’s predecessor-but-one, Mauricio Macri, adopted an explicitly gradualist approach to reform when he assumed office in 2015, since that was deemed most appropriate in view of Argentina’s notably delicate social fabric. It failed.

Striking a geopolitical balance

It’s not so much the speed of adjustment that determines a country’s chances of economic stabilisation, but rather the depth of the problem and the domestic and global politics surrounding the adjustment. In those respects, Türkiye has an edge over Argentina.

For one thing, the hole that Milei has to dig Argentina out of is very deep, and his political authority is frail compared to that of his Turkish counterpart. Argentina’s external debt, around $280bn, is more than two-and-a-half times the value of the country’s exports. Much of this comes due quickly, and debt restructuring – Argentina’s third since 2001 – will be necessary. Nationwide strikes are planned later this month.

Second, although neither country been attracting much in the way of long-term capital recently, Türkiye has a better chance to do so if, and when, macro stabilisation is achieved. Its more diversified economy, proximity to the European Union and (currently) rather balanced diplomacy make it a destination for ‘near-shoring’ flows of foreign direct investment much more naturally than Argentina could hope for.

While Türkiye has relatively balanced geopolitical relationships, which have helped it attract tens of billions of financial commitments from the Gulf, Argentina is unlikely to be well-served by Milei’s ambivalence towards China – the top buyer of Argentine soybeans and beef, an important investor in Argentine lithium and a key supplier of external financing in the form of a bilateral currency swap.

Milei has dialled back his earlier more explicit hostility towards Beijing, but his decision to eschew membership of the Brics bloc seems more ideological than practical. It is unlikely to win him many friends among China’s leaders.

Countries with the kind of economic stress facing Argentina and Türkiye need all the friends they can get. For now, at least, Erdoğan is better at cultivating those friendships than Milei. If economic stabilisation is achievable, the rewards might be relatively attractive.

David Lubin is Senior Research Fellow at Chatham House.

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