Can Populist Governments Always Crash the Economy?

“Exchange, exchange.” Beneath the blazing sun, dozens of currency traders are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a country accustomed to holding the greenback.

“The best time to buy is currently,” states a arbolito, declining to give her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Similar to her, economists across the spectrum anticipate a devaluation of the national currency once the voting is over. President Javier Milei has imposed a limit on the peso to control triple-digit inflation and now it is overvalued and foreign reserves are exhausted, leaving the national economy sluggish as buyers turn to cheap imports.

Ideal Conditions

The nation represents a unique situation. The country has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been susceptible for decades to left-leaning populist movements, in the form of the powerful Peronist movement, and now Milei’s conservative populism.

The president is a textbook populist: captivating, unconventional, promising forceful measures to reclaim control of the economy from the establishment on behalf of ordinary citizens.

These defining traits are shared by his ally in the United States, and by the UK politician, who styles himself as a beer-drinking people’s champion despite being a privately educated former stockbroker.

Up until lately, the president’s strategy – including widespread sell-offs and deep public spending cuts – had earned praise from international lenders for contributing to bring price rises in check. This plan shares similarities with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a dragon to be defeated, no matter the cost.

But financial markets started to doubt in Milei’s radical project lately following a poor performance in provincial elections and multiple graft allegations. Solely massive economic support by the US has prevented what looked set to become a major monetary collapse.

Inconsistencies

The vote for Brexit in 2016 arguably had some of the same logic, and its leader, Boris Johnson, dismissed concerns regarding fiscal impacts with confident resolve to implement public demand despite the establishment’s horror.

The Reform leader to date outlined limited plans in writing aside from a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He aims to rein in the central bank, perhaps even ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment being a key part of populist rhetoric.

His fiscal plans appear to be in flux: wary of being accused of planning reckless spending, he recently dropped a pledge to make significant tax reductions. His Reform party deputy, Richard Tice, stated they would focus instead on reductions in government expenditure.

The opposition aims this position will allow it to depict Farage as intending to bring back austerity – a point Rachel Reeves has emphasized often, contrasting it with her strategy of boosting public investment.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “Reform is funded by very wealthy people calling for tax cuts and reduced rules, but also talking a lot about the grievances of working people and the loss in manufacturing employment,” he says. “There’s a tension here between wealthy supporters seeking Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”

Maintaining Control

Realistically, the evidence indicates populists of any stripe tend to fare well when faced with practical difficulties (although each charismatic individual claims to offer something unique).

A recent paper in the American Economic Review examined the outcomes of dozens of populist leaders, from 1900 to 2020. It found typically, over the long term, GDP per capita is often a tenth less in nations run by populist rulers than in similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the decay of governance usually occur together under populist governments,” contend the researchers.

A further interesting result from the study, though, is that even with their negative impacts, these leaders are often effective at holding on to power, remaining in power for a considerable time, compared with four for mainstream politicians.

In other words, it is not clear that even when their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their appeal extends past mundane economics.

But back in Buenos Aires, whether the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people are already bearing significant costs.