Can Populist Governments Always Crash the Economy?

“Exchange, exchange.” Under the blazing sun, dozens of money changers are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the 26 October congressional elections in a country accustomed to holding the US dollar.

“The best time for purchasing is currently,” states one arbolito, declining to give her identity. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”

Similar to her, economic experts from all backgrounds anticipate a depreciation of the national currency after the election concludes. President Javier Milei has placed a limit on the peso to tame triple-digit price increases and now it is overvalued and foreign reserves are exhausted, leaving Argentina’s economy stagnant as buyers turn to low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been hit by debt defaults and financial turmoil and the electorate have been susceptible for decades to left-leaning populist movements, in the form of the influential Peronism, and currently the president’s conservative populism.

The president is a textbook populist: captivating, unconventional, vowing muscular measures to reclaim command of economic management from traditional elites on behalf of the people.

These key characteristics are shared by his ally to the north, as well as the UK politician, who styles himself as a beer-drinking people’s champion despite being a public school-educated former stockbroker.

Until recent months, Milei’s approach – including widespread sell-offs and severe budget reductions – had earned praise from the IMF for helping to control price rises under control. This plan shares similarities with that of his political hero Margaret Thatcher, who also saw inflation as a monster to be slain, no matter the cost.

But financial markets began losing confidence in Milei’s radical project in recent months following a shaky result in provincial elections and multiple graft allegations. Solely massive financial intervention by the US has averted what seemed destined to be a full-blown currency crisis.

Inconsistencies

The 2016 referendum several years ago likely contained similar reasoning, and its leader, the former prime minister, swept away concerns about economic detail with confident resolve to implement the “will of the people” in the face of elite opposition.

The Reform leader to date committed few policies in writing aside from a call for mass deportations, which he subsequently appeared to revise spontaneously. He wants to rein in the central bank, perhaps even replacing its head, Andrew Bailey, with scepticism of a stodgy establishment being a key part of the populist package.

His fiscal plans appear to be in flux: wary of facing criticism for proposing reckless spending, he lately abandoned a pledge to make significant tax cuts. His Reform party deputy, the party chairman, stated they would concentrate instead on public spending cuts.

The opposition aims this stance will enable it to depict the populist 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 are contradictions within the populist platform, as it stands. “The party are bankrolled by affluent backers demanding lower taxes and deregulation, yet also talking a lot about the complaints of working people and the decline in manufacturing employment,” he explains. “There’s a tension here among wealthy supporters who want Thatcherism on steroids, and this story of bringing back UK employment and reindustrialisation.”

Holding on to Power

Realistically, research indicates neither left nor right populists often perform poorly when confronting real-world challenges (though of course each charismatic individual promises something unique).

Recent research in the American Economic Review analysed the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, over the long term, GDP per capita is often 10% lower in countries governed by populist leaders than in similar economies under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually occur together with populist rule,” contend the paper’s authors.

Another intriguing finding from the study, however, is even with their negative impacts, these leaders tend to be good at retaining office, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.

Put simply, it remains uncertain whether even if their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their appeal reaches beyond mundane economics.

Yet returning to Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, Argentina’s citizens are already bearing a heavy price.