Can Populist-Led Governments Always Crash the Economy?

“Cambio, cambio.” Under the scorching heat, scores of currency traders are selling US dollars along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the October 26 congressional elections in a nation long used to holding the greenback.

“The best time to buy is now,” states one arbolito, refusing to provide her identity. “[The dollar] dropped a little but it’s deceptive – 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 control triple-digit price increases and currently it remains artificially high and reserves are exhausted, leaving the national economy sluggish as consumers opt for cheap imports.

Ideal Conditions

The nation is a very special case. Argentina has frequently been racked by sovereign defaults and economic crises 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 rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, vowing forceful policies to wrestle back control of the economy from the establishment for the benefit of the people.

These key characteristics are shared by his ally to the north, and by the UK politician, who styles himself as a pint-swilling people’s champion despite being a public school-educated ex-finance professional.

Until recent months, Milei’s approach – involving widespread sell-offs and severe public spending cuts – had won plaudits from international lenders for helping to bring price rises under control. This plan shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed inflation as a dragon to be slain, regardless of the consequences.

But financial markets began losing confidence in Milei’s radical project lately following a shaky result in local polls and a series of corruption scandals. Solely large-scale economic support by the US has averted what seemed destined to be a major currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained similar reasoning, and its leader, Boris Johnson, swept away concerns about economic detail with confident resolve to enact public demand despite elite opposition.

The Reform leader to date committed few policies to paper except for a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He wants to curb the Bank of England, possibly replacing its head, Andrew Bailey, with distrust of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies seem unsettled: wary of facing criticism for planning a Liz Truss-style splurge, he recently dropped a promise to make significant tax cuts. His second-in-command, the party chairman, stated they would concentrate instead on public spending cuts.

The opposition aims this stance will enable it to portray the populist as planning to reintroduce austerity – a point the chancellor has made repeatedly, contrasting it with her strategy of boosting government spending.

Jo Michell says there exist inconsistencies in Farage’s economic programme, as it stands. “Reform are bankrolled by affluent backers calling for tax cuts and deregulation, but also emphasizing the grievances of working people and the loss in manufacturing employment,” he explains. “There is a conflict there among wealthy supporters who want Thatcherism on steroids, and this story of bringing back UK employment and industrial revival.”

Holding on to Power

In truth, research indicates neither left nor right populists often perform poorly when faced with practical difficulties (though of course each charismatic individual claims to offer distinct solutions).

A recent paper in the American Economic Review analysed the outcomes of dozens of populist leaders, from 1900 to 2020. It found typically, over the long term, gross domestic product per head is often 10% lower in nations run by populist leaders than in comparable countries with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually occur together with populist rule,” argue the researchers.

Another intriguing finding of the research, though, is despite their economic costs, populist figures tend to be good at retaining office, lasting on average eight years, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear whether even if their policies fail, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their appeal extends past mundane economics.

But returning to Buenos Aires, regardless of if Milei’s populist project fails or is sustained by external aid, Argentina’s citizens are already bearing significant costs.