Do Populist Governments Always Crash the Economic System?

“Exchange, exchange.” Beneath the scorching heat, dozens of money changers are selling US dollars along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 congressional elections in a country accustomed to saving in the US dollar.

“The optimal moment to buy is now,” says one arbolito, refusing to provide her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists from all backgrounds anticipate a depreciation of the national currency after the voting concludes. The president has imposed a limit on the currency to tame triple-digit inflation and now it is artificially high and foreign reserves are depleted, causing the national economy stagnant as buyers turn to cheap imports.

Fertile Ground

The nation represents a unique situation. The country has frequently been hit by sovereign defaults and economic crises and its voters have been receptive over the years to leftwing populism, in the form of the powerful Peronist movement, and now the president’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, promising forceful policies to wrestle back command of economic management from traditional elites for the benefit of ordinary citizens.

These key characteristics are also seen in his political partner to the north, and by Nigel Farage, who styles himself as a pint-swilling champion of the common man even though he is a privately educated ex-finance professional.

Up until lately, Milei’s approach – including extensive privatisations and deep budget reductions – had earned praise from international lenders for helping to control price rises under control. This plan shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be slain, regardless of the consequences.

However investors started to doubt in Milei’s radical project lately following a shaky result in provincial elections and a series of graft allegations. Solely large-scale financial intervention from abroad has averted what seemed destined to be a major currency crisis.

Inconsistencies

The 2016 referendum in 2016 arguably had similar reasoning, and its figurehead, the former prime minister, swept away concerns about economic detail with a bullish determination to enact public demand despite elite opposition.

Farage has so far outlined limited plans to paper aside from proposals for large-scale removals, that he later seemed to adjust spontaneously. He wants to curb the Bank of England, possibly replacing its head, the incumbent, with scepticism of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies seem unsettled: concerned about facing criticism for planning reckless spending, he lately abandoned a promise to make significant tax cuts. His second-in-command, Richard Tice, said they would concentrate instead on public spending cuts.

Labour hopes this stance will enable it to portray the populist as intending to bring back austerity – a point the chancellor has made repeatedly, contrasting it with her strategy of increasing government spending.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, as it stands. “Reform are bankrolled by affluent backers calling for lower taxes and reduced rules, yet also talking a lot about the grievances of working people and the loss of industrial jobs,” he explains. “There is a conflict there between wealthy supporters who want Thatcherism on steroids, and this story of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, research indicates neither left nor right populists often perform poorly when faced with practical difficulties (although every populist leader promises something unique).

A recent paper in the American Economic Review analysed the performance 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 governed by populist leaders than in comparable countries under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand under populist governments,” contend the researchers.

Another intriguing finding from the study, though, is even with their negative impacts, these leaders tend to be good at holding on to power, remaining in power for a considerable time, versus shorter tenures for mainstream politicians.

In other words, it remains uncertain that even when their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their appeal extends past everyday financial matters.

But back in Buenos Aires, regardless of if the government’s agenda fails or is sustained by external aid, Argentina’s citizens have already paid significant costs.