Can Populist-Led Governments Always Crash the Economy?

“Dollars, dollars.” Under the scorching heat, dozens of money changers are hawking American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the October 26 midterm elections in a country accustomed to saving in the US dollar.

“The best time to buy is now,” states one arbolito, refusing to provide her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economists from all backgrounds expect a devaluation of the Argentine peso once the election concludes. The president has placed a limit on the peso to control soaring price increases and now it remains overvalued and foreign reserves are depleted, leaving Argentina’s economy stagnant as consumers opt for low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by sovereign defaults and economic crises and its voters have been susceptible over the years to leftwing populism, in the form of the influential Peronist movement, and now Milei’s conservative populism.

The president is a textbook populist: charismatic, unconventional, promising forceful measures to wrestle back command of the economy from traditional elites for the benefit of the people.

These defining traits are shared by his political partner to the north, and by Nigel Farage, who styles himself as a beer-drinking people’s champion despite being a public school-educated former stockbroker.

Up until lately, Milei’s approach – involving extensive privatisations and deep public spending cuts – had earned praise from international lenders for contributing to control price rises in check. This plan has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a dragon to be slain, no matter the cost.

But investors began losing confidence in Milei’s radical project in recent months after a poor performance in provincial elections and a series of graft allegations. Solely large-scale economic support from abroad has averted what looked set to become a major monetary collapse.

Inconsistencies

The 2016 referendum in 2016 arguably had similar reasoning, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to enact the “will of the people” despite the establishment’s horror.

The Reform leader has so far outlined limited plans to paper aside from a call for large-scale removals, which he subsequently appeared to revise on the hoof. He aims to curb the Bank of England, possibly ditching its governor, the incumbent, with scepticism toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies appear to be unsettled: wary of being accused of planning a Liz Truss-style splurge, he lately dropped a pledge for significant tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on reductions in government expenditure.

The opposition hopes this position will enable it to portray Farage as planning to reintroduce austerity – a point the chancellor has emphasized often, contrasting it with her strategy of boosting public investment.

Jo Michell notes there exist inconsistencies within the populist platform, as it stands. “Reform is funded by affluent backers calling for tax cuts and deregulation, but also emphasizing the grievances of working people and the loss of industrial jobs,” he says. “There’s a tension here among wealthy supporters who want radical free-market policies, and this story of restoring British jobs and industrial revival.”

Maintaining Control

In truth, the evidence suggests populists of any stripe often perform poorly when confronting practical difficulties (though of course each charismatic individual promises something unique).

Recent research from a leading journal analysed the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, after 15 years, GDP per capita tends to be a tenth less in countries run by populist rulers than in comparable countries under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” argue the researchers.

Another intriguing finding from the study, though, is despite their economic costs, these leaders are often effective at holding on to power, remaining in power for eight years, versus four for mainstream politicians.

Put simply, it is not clear that even when their plans crash, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their appeal extends past everyday financial matters.

But back in Buenos Aires, regardless of if the government’s agenda collapses or is sustained through foreign assistance, Argentina’s citizens have already paid significant costs.