Can Populist Governments Always Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, scores of money changers are offering US dollars along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a nation accustomed to saving in the greenback.

“The best time to buy is now,” states a arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it is a fake-out – it’ll rise again.”

Similar to her, economists from all backgrounds anticipate a devaluation of the national currency after the election is over. President Javier Milei has placed a limit on the currency to tame soaring inflation and currently it remains overvalued and foreign reserves are exhausted, causing Argentina’s economy stagnant as consumers opt for low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. Argentina has frequently been hit by debt defaults and economic crises and its voters have been susceptible over the years to left-leaning populist movements, in the form of the powerful Peronist movement, and now the president’s conservative populism.

Milei is a textbook populist: captivating, iconoclastic, vowing forceful policies to reclaim control of the economy from traditional elites on behalf of ordinary citizens.

These defining traits are shared by his ally in the United States, and by Nigel Farage, who styles himself as a pint-swilling champion of the common man even though he is a privately educated ex-finance professional.

Until recent months, Milei’s approach – involving widespread sell-offs and severe public spending cuts – had earned praise from international lenders for contributing to control price rises in check. The programme shares similarities with that of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, no matter the cost.

But financial markets started to doubt in Milei’s radical project in recent months following a shaky result in local polls and multiple corruption scandals. Solely large-scale economic support from abroad has averted 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, swept away concerns regarding fiscal impacts with confident resolve to enact the “will of the people” despite the establishment’s horror.

Farage has so far committed few policies in writing aside from proposals for large-scale removals, that he later seemed to adjust spontaneously. He aims to rein in the central bank, possibly replacing its head, the incumbent, with scepticism toward traditional institutions as a central element of the populist package.

His fiscal plans appear to be in flux: wary of facing criticism for planning reckless spending, he recently dropped a pledge to make significant tax cuts. His second-in-command, the party chairman, said they would focus instead on reductions in government expenditure.

Labour hopes this stance will enable it to portray Farage as intending to reintroduce fiscal tightening – an argument the chancellor has emphasized often, comparing it unfavorably to her strategy of increasing public investment.

An economics professor notes there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by affluent backers calling for tax cuts and deregulation, yet also emphasizing the grievances of working people and the decline of industrial jobs,” he explains. “There’s a tension here between rich backers who want radical free-market policies, and this narrative of bringing back UK employment and industrial revival.”

Holding on to Power

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

A recent paper in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, over the long term, gross domestic product per head tends to be a tenth less in countries run by populist leaders than in similar economies with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually go hand in hand under populist governments,” contend the researchers.

A further interesting result from the study, however, is that despite their economic costs, populist figures are often effective at retaining office, lasting on average eight years, versus shorter tenures for their more moderate equivalents.

In other words, it remains uncertain whether even if their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their appeal extends past mundane economics.

But back in Buenos Aires, regardless of if Milei’s populist project fails or is kept on life support through foreign assistance, Argentina’s citizens have already paid a heavy price.