Can Populist-Led Governments Always Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, scores of money changers are selling US dollars on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a country accustomed to saving in the greenback.

“The optimal moment for purchasing is now,” says one arbolito, declining to give her name. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Like her, economic experts from all backgrounds anticipate a devaluation of the Argentine peso once the election concludes. President Javier Milei has placed a cap on the peso to tame soaring inflation and now it remains overvalued and reserves are exhausted, leaving Argentina’s economy sluggish as buyers turn to low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. The country has been repeatedly hit 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 powerful Peronism, and now Milei’s rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, vowing muscular policies to wrestle back command of economic management from the establishment on behalf of the people.

These defining traits are shared by his ally to the north, and by the UK politician, who presents himself as a pint-swilling people’s champion despite being a privately educated ex-finance professional.

Up until lately, Milei’s approach – including widespread sell-offs and severe public spending cuts – had won plaudits from the IMF for helping to control price rises under control. The programme has something in common with that of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a dragon to be slain, regardless of the consequences.

However financial markets started to doubt in Milei’s radical project in recent months following a shaky result in local polls and a series of corruption scandals. Solely large-scale financial intervention from abroad has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 arguably had some of the same logic, and its figurehead, Boris Johnson, swept away doubts regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of elite opposition.

The Reform leader to date outlined limited plans to paper aside from proposals for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to rein in the central bank, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions as a central element of the populist package.

His tax and spending policies appear to be unsettled: wary of facing criticism for planning reckless spending, he recently abandoned a pledge for significant tax cuts. His Reform party deputy, the party chairman, said they would concentrate instead on reductions in government expenditure.

The opposition hopes this position will enable it to portray Farage as planning to bring back austerity – an argument Rachel Reeves has emphasized often, contrasting it with her strategy of boosting government spending.

An economics professor says there exist inconsistencies in Farage’s economic programme, as it stands. “Reform are bankrolled by affluent backers calling for tax cuts and reduced rules, but also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict here among rich backers who want radical free-market policies, and this narrative of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, research indicates populists of any stripe tend to fare well when faced with real-world challenges (though of course every populist leader promises something unique).

A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed that on average, over the long term, GDP per capita tends to be 10% lower in countries run by populist leaders than in comparable countries under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically go hand in hand with populist rule,” argue the paper’s authors.

A further interesting result from the study, however, is despite their economic costs, these leaders are often effective at retaining office, remaining in power for a considerable time, compared with shorter tenures for mainstream politicians.

In other words, it is not clear whether even if their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction extends past everyday financial matters.

But returning to Buenos Aires, whether Milei’s populist project collapses or is sustained by external aid, the Argentine people have already paid significant costs.