Can Populist Governments Inevitably Crash the Economy?
“Exchange, exchange.” Under the blazing sun, scores of currency traders are selling American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the October 26 midterm elections in a nation long used to holding the greenback.
“The optimal moment for purchasing is now,” states a arbolito, refusing to provide her identity. “[The dollar] went down slightly but it is a fake-out – it will rebound.”
Similar to her, economists across the spectrum anticipate a depreciation of the national currency once the election concludes. The president has placed a cap on the currency to control soaring inflation and currently it is artificially high and foreign reserves are depleted, causing the national economy stagnant as consumers opt for low-cost foreign goods.
Ideal Conditions
The nation is a very special case. Argentina has been repeatedly hit by sovereign defaults and financial turmoil and its voters have been susceptible for decades to left-leaning populist movements, in the form of the powerful Peronism, and now the president’s conservative populism.
Milei epitomizes populist leadership: charismatic, iconoclastic, vowing muscular policies to reclaim command of economic management from traditional elites for the benefit of ordinary citizens.
These defining traits are also seen in his ally to the north, and by Nigel Farage, who styles himself as a pint-swilling people’s champion despite being a public school-educated former stockbroker.
Until recent months, Milei’s approach – including widespread sell-offs and severe public spending cuts – had earned praise from international lenders for contributing to control price rises in check. This plan shares similarities with the policies of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a dragon to be defeated, no matter the cost.
However financial markets started to doubt in the government’s agenda in recent months following a poor performance in provincial elections and multiple graft allegations. Only massive financial intervention from abroad has prevented what seemed destined to be a full-blown monetary collapse.
Contradictions
The vote for Brexit several years ago arguably had similar reasoning, and its figurehead, the former prime minister, swept away doubts regarding fiscal impacts with confident resolve to enact public demand despite elite opposition.
Farage to date outlined limited plans in writing except for a call for mass deportations, which he subsequently seemed to adjust spontaneously. He aims to rein in the central bank, perhaps even ditching its governor, the incumbent, with distrust toward traditional institutions being a key part of populist rhetoric.
His fiscal plans seem unsettled: wary of facing criticism for planning reckless spending, he lately abandoned a pledge for large tax reductions. His Reform party deputy, Richard Tice, stated they would concentrate instead on public spending cuts.
The opposition aims this stance will allow it to depict the populist as intending to bring back fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting government spending.
Jo Michell says there exist inconsistencies within the populist platform, such as it is. “Reform is funded by very wealthy people calling for lower taxes and reduced rules, but also emphasizing the grievances of ordinary workers and the decline of industrial jobs,” he says. “There’s a tension here among rich backers who want radical free-market policies, and this story of restoring British jobs and reindustrialisation.”
Holding on to Power
Realistically, research suggests populists of any stripe often perform poorly when confronting real-world challenges (although each charismatic individual claims to offer something unique).
Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, over the long term, GDP per capita tends to be a tenth less in countries governed by populist leaders than in comparable countries under conventional leadership.
“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” contend the paper’s authors.
A further interesting result of the research, though, is even with their negative impacts, populist figures are often effective at holding on to power, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.
Put simply, it is not clear that even when their plans crash, populists face immediate consequences in elections. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.
Yet returning to Buenos Aires, regardless of if Milei’s populist project fails or is sustained by external aid, the Argentine people are already bearing a heavy price.
