Can Populist-Led Governments Always Crash the Economy?

“Exchange, exchange.” Under the scorching heat, scores of money changers are offering American currency on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the October 26 midterm elections in a nation accustomed to saving in the greenback.

“The optimal moment to buy is currently,” states one arbolito, refusing to provide her identity. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Like her, economists from all backgrounds anticipate a devaluation of the national currency after the election is over. The president has imposed a limit on the currency to tame triple-digit inflation and currently it is artificially high and foreign reserves are exhausted, leaving Argentina’s economy sluggish as buyers turn to cheap imports.

Ideal Conditions

The nation represents a unique situation. Argentina has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronism, and now the president’s conservative populism.

Milei is a textbook populist: captivating, iconoclastic, promising muscular measures to wrestle back command of the economy from traditional elites for the benefit of the people.

These key characteristics are also seen in his political partner in the United States, and by the UK politician, who presents himself as a pint-swilling people’s champion even though he is a public school-educated former stockbroker.

Up until lately, the president’s strategy – including widespread sell-offs and deep budget reductions – had earned praise from international lenders for contributing to bring price rises under control. This plan shares similarities with that of Milei’s idol Margaret Thatcher, who also saw rising prices as a dragon to be defeated, regardless of the consequences.

But investors began losing confidence in Milei’s radical project in recent months after a poor performance in provincial elections and a series of corruption scandals. Only large-scale financial intervention from abroad has averted what seemed destined to be a major monetary collapse.

Inconsistencies

The vote for Brexit in 2016 likely contained some of the same logic, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to implement public demand despite elite opposition.

Farage has so far committed few policies in writing aside from proposals for large-scale removals, which he subsequently seemed to adjust on the hoof. He wants to curb the central bank, possibly replacing its head, Andrew Bailey, with scepticism of a stodgy establishment being a key part of the populist package.

His fiscal plans seem in flux: wary of being accused of proposing a Liz Truss-style splurge, he lately abandoned a pledge for large tax reductions. His Reform party deputy, the party chairman, said they would focus instead on reductions in government expenditure.

Labour hopes this stance will allow it to depict Farage as planning to reintroduce austerity – a point the chancellor has emphasized often, comparing it unfavorably to her approach of boosting public investment.

An economics professor says there are contradictions in Farage’s economic programme, as it stands. “Reform is funded by very wealthy people calling for tax cuts and deregulation, yet also emphasizing the grievances of working people and the loss in manufacturing employment,” he says. “There is a conflict there between wealthy supporters seeking radical free-market policies, and this story of bringing back UK employment and industrial revival.”

Holding on to Power

Realistically, the evidence indicates populists of any stripe often perform poorly when confronting real-world challenges (though of course each charismatic individual claims to offer distinct solutions).

Recent research in the American Economic Review examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, after 15 years, GDP per capita is often a tenth less in nations run by populist rulers than in similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance usually go hand in hand under populist governments,” argue the researchers.

Another intriguing finding of the research, however, is that despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for a considerable time, versus shorter tenures for mainstream politicians.

Put simply, it is not clear whether even if their policies fail, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond everyday financial matters.

But returning to Buenos Aires, whether the government’s agenda fails or is kept on life support through foreign assistance, Argentina’s citizens have already paid a heavy price.