Can radical reform unlock Argentina's long-awaited economic recovery?

Nobel laureate Simon Kuznets is frequently cited as having said: “There are four kinds of countries: developed, emerging, Japan… and Argentina.” His point: Argentina possesses many ingredients for sustainable prosperity, yet has repeatedly failed to deliver on its potential.

It’s a paradox that continues to fascinate. At the dawn of the 20th century, Argentina’s real gross domestic product (GDP) per capita rivaled that of the UK and US, and was more than double that of Spain. Today, Argentina has endured repeated bouts of hyperinflation, financial crises, and astonishingly, nine sovereign defaults. The world watches with interest as the country’s political pendulum swings, with Javier Milei now in power.

At the heart of Argentina’s chronic malaise is the ever-expanding role of the state in economic affairs. The country has run fiscal deficits in 57 out of 65 years. Over half the population received direct government transfers in 2022.

Chronic overspending, combined with shallow domestic capital markets, has forced Argentina to rely on short-term, floating-rate or foreign-currency debt – the so-called “original sin” of emerging markets. This makes the economy especially vulnerable to shocks, as any negative development can quickly undermine the currency and the government’s ability to service its obligations. Meanwhile, pervasive intervention, regulation and taxation have consistently stifled business and investment.

Why has Argentina’s big government model survived for so long? The answers are complex and hotly debated, ranging from cultural factors to the enduring legacy of Peronism, the populist movement that has shaped the country since 1947.

Milei’s victory last year reflects a growing desire among many Argentines to break this cycle of state overreach. Faced with stagnant growth, triple-digit inflation and widespread economic distortions, voters opted for radical change. Yet the country remains deeply polarized, with the President’s negative approval ratings consistently above 40%.

Remarkably, Milei has achieved what few democratically elected leaders have: erasing a fiscal deficit of over 4% of GDP in a single year via expenditure curbs and surviving politically to tell the tale. This has driven down country risk, collapsed inflation and set the stage for renewed growth – albeit after a painful adjustment.

International recognition has followed. The International Monetary Fund (IMF) recently approved a new $20 billion programme, and the US administration sent a strong signal of support, with Treasury Secretary Scott Bessent visiting Buenos Aires and pledging financial assistance if needed.

Historically, when a country signals credible intent to pursue structural economic transformation, private capital tends to follow in distinct waves. Domestic investors are usually the first to respond, increasing their allocations to local financial assets – such as publicly traded equities and government bonds – as confidence builds. This is often followed by foreign investors, whose interest in liquid assets picks up as macroeconomic stability improves.

As reforms take root and the outlook becomes more durable, local investors begin to shift focus toward less-liquid, real-economy opportunities: expanding manufacturing capacity, investing in infrastructure and developing real estate. The final, and most transformative, stage is the return of meaningful foreign direct investment (FDI) in the real economy to help drive long-term growth.

We are already seeing clear signs of this sequence in Argentina. Both local and foreign investors have increased their exposure to Argentine financial assets in recent quarters, and domestic investors are actively pursuing opportunities in real assets. The key question now is whether FDI – a true gauge of international confidence in Argentina’s turnaround – will return at scale.

Several sectors stand out as particularly promising for FDI. Argentina’s energy sector, especially oil and gas (notably the Vaca Muerta shale formation), has long attracted global interest and could see renewed investment if regulatory and contractual stability is maintained. The country’s vast reserves of lithium and other critical minerals position it as a potential leader in the global energy transition. Additionally, Argentina’s resourceful technology and knowledge sector – spanning software, fintech and agritech – has long been a standout in the region.

Still, for Argentina to achieve lasting economic growth and attract sustained private investment, deeper structural reforms are essential – especially in labour, tax and social security. With Milei lacking a working majority in Congress, these may have to wait until after October’s mid-term elections.

The outlook remains binary: if Milei can maintain public support and push through at least some reforms, Argentina may finally begin to more permanently heal its macroeconomic wounds. If not, entrenched interests could block progress, risking renewed political and economic crises. There is little room for half measures.

For the first time in decades, Argentina has a real opportunity to chart a more promising course. Whether it can attract and retain FDI across key sectors will be a reliable measure of its progress – and its prospects for lasting economic renewal.