Can Populist Governments Always Crash the Economy?
“Dollars, dollars.” Beneath the blazing sun, dozens of currency traders are hawking US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the October 26 midterm elections in a country long used to saving in the US dollar.
“The best time for purchasing is currently,” says a arbolito, declining to give her name. “[The dollar] went down a little but it’s deceptive – it will rebound.”
Similar to her, economic experts across the spectrum anticipate a devaluation of the national currency after the election is over. President Javier Milei has imposed a limit on the peso to tame soaring inflation and now it is artificially high and foreign reserves are depleted, leaving the national economy stagnant as buyers opt for cheap imports.
Ideal Conditions
The nation represents a unique situation. Argentina has been repeatedly racked by sovereign defaults and financial turmoil and its voters have been susceptible for decades to leftwing populism, in the form of the powerful Peronist movement, and currently the president’s rightwing version.
Milei is a textbook populist: charismatic, unconventional, vowing muscular policies to reclaim command of economic management from traditional elites on behalf of the people.
These defining traits are also seen in his ally to the north, as well as the UK politician, who styles himself as a pint-swilling people’s champion despite being a public school-educated former stockbroker.
Up until lately, Milei’s approach – including widespread sell-offs and deep public spending cuts – had earned praise from international lenders for contributing to control inflation in check. The programme shares similarities with the policies of Milei’s idol the former UK prime minister, who also saw inflation as a monster to be slain, no matter the cost.
But investors started to doubt in the government’s agenda lately after a poor performance in provincial elections and a series of corruption scandals. Solely massive financial intervention from abroad has prevented what looked set to become a major currency crisis.
Contradictions
The vote for Brexit several years ago likely contained some of the same logic, and its leader, the former prime minister, swept away concerns regarding fiscal impacts with a bullish determination to implement the “will of the people” in the face of the establishment’s horror.
The Reform leader has so far outlined limited plans in writing aside from a call for large-scale removals, that he later appeared to revise spontaneously. He aims to rein in the Bank of England, perhaps even ditching its governor, Andrew Bailey, with distrust toward traditional institutions being a key part of populist rhetoric.
His fiscal plans seem in flux: wary of facing criticism for proposing reckless spending, he recently abandoned a promise for significant tax cuts. His second-in-command, the party chairman, said they would concentrate instead on reductions in government expenditure.
Labour aims this position will allow it to portray the populist as planning to reintroduce austerity – a point the chancellor has made repeatedly, comparing it unfavorably to her approach of boosting government spending.
An economics professor says there exist inconsistencies in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for tax cuts and reduced rules, but also talking a lot about the complaints of ordinary workers and the loss in manufacturing employment,” he explains. “There is a conflict here among rich backers seeking radical free-market policies, and this story of restoring UK employment and industrial revival.”
Holding on to Power
Realistically, research suggests populists of any stripe often perform poorly when faced with practical difficulties (although each charismatic individual promises distinct solutions).
Recent research in the American Economic Review examined the outcomes of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, over the long term, GDP per capita is often 10% lower in nations governed by populist rulers compared to comparable countries with more mainstream regimes.
“Financial decline, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand with populist rule,” contend the paper’s authors.
Another intriguing finding of the research, however, is even with their negative impacts, populist figures tend to be good at retaining office, remaining in power for a considerable time, compared with shorter tenures for their more moderate equivalents.
Put simply, it is not clear whether even if their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their attraction extends past mundane economics.
Yet returning to Buenos Aires, regardless of if Milei’s populist project fails or is kept on life support through foreign assistance, Argentina’s citizens are already bearing significant costs.