Do Populist Governments Always Crash the Economy?
“Cambio, cambio.” Beneath the blazing sun, scores of money changers are offering American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the 26 October congressional elections in a country long used to holding the US dollar.
“The best time for purchasing is currently,” states one arbolito, refusing to provide her name. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”
Like her, economic experts from all backgrounds expect a depreciation of the national currency once the election concludes. The president has placed a cap on the peso to tame triple-digit inflation and currently it is overvalued and foreign reserves are exhausted, leaving the national economy sluggish as consumers opt for cheap imports.
Fertile Ground
Argentina represents a unique situation. Argentina has frequently been racked by debt defaults and economic crises and its voters have been receptive for decades to leftwing populism, such as the powerful Peronist movement, and now Milei’s rightwing version.
The president epitomizes populist leadership: captivating, unconventional, vowing muscular policies to wrestle back command of economic management from traditional elites for the benefit of the people.
These defining traits are shared by his ally in the United States, as well as the UK politician, who styles himself as a pint-swilling people’s champion despite being a privately educated former stockbroker.
Up until lately, Milei’s approach – including widespread sell-offs and deep public spending cuts – had earned praise from the IMF for contributing to control inflation in check. This plan shares similarities with that of his political hero the former UK prime minister, who also saw rising prices as a dragon to be defeated, regardless of the consequences.
However financial markets started to doubt in the government’s agenda in recent months after a poor performance in local polls and multiple graft allegations. Only massive economic support by the US has prevented 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, dismissed doubts about economic detail with confident resolve to implement public demand in the face of elite opposition.
The Reform leader has so far outlined limited plans in writing except for proposals for large-scale removals, which he subsequently seemed to adjust on the hoof. He aims to curb the central bank, perhaps even ditching its governor, the incumbent, with scepticism toward traditional institutions being a key part of the populist package.
His tax and spending policies appear to be in flux: wary of being accused of planning a Liz Truss-style splurge, he lately dropped a promise for significant tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on reductions in government expenditure.
Labour hopes this stance will allow it to depict Farage as intending to reintroduce fiscal tightening – an argument the chancellor has emphasized often, comparing it unfavorably to her approach of increasing public investment.
An economics professor notes there exist inconsistencies in Farage’s economic programme, such as it is. “The party is funded by affluent backers demanding lower taxes and deregulation, but also emphasizing the complaints of ordinary workers and the decline in manufacturing employment,” he says. “There’s a tension there between rich backers seeking radical free-market policies, and this narrative of bringing back British jobs and industrial revival.”
Maintaining Control
Realistically, research suggests neither left nor right populists tend to fare well when faced with real-world challenges (though of course each charismatic individual claims to offer distinct solutions).
Recent research from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, gross domestic product per head is often a tenth less in nations governed by populist rulers than in similar economies under conventional leadership.
“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 from the study, however, is even with their negative impacts, these leaders are often effective at holding on to power, remaining in power for a considerable time, compared with shorter tenures for mainstream politicians.
Put simply, it remains uncertain that even when their plans crash, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to “take back control”, their appeal extends past mundane economics.
Yet back in Buenos Aires, regardless of if the government’s agenda fails or is sustained through foreign assistance, the Argentine people have already paid a heavy price.
