Can Populist Administrations Always Crash the Economy?

“Dollars, dollars.” Under the scorching heat, dozens of money changers are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the October 26 congressional elections in a country accustomed to holding the US dollar.

“The best time to buy is now,” states one arbolito, declining to give her name. “[The dollar] dropped a little but it is a fake-out – it will rebound.”

Similar to her, economic experts from all backgrounds expect a depreciation of the national currency once the voting concludes. President Javier Milei has imposed a limit on the peso to tame triple-digit price increases and currently it remains artificially high and foreign reserves are exhausted, leaving Argentina’s economy stagnant as consumers opt for cheap imports.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by sovereign defaults and economic crises and the electorate have been susceptible for decades to leftwing populism, in the form of the powerful Peronism, and currently the president’s rightwing version.

Milei is a textbook populist: captivating, unconventional, promising muscular policies to reclaim control of the economy from traditional elites on behalf of ordinary citizens.

These key characteristics are shared by his ally to the north, as well as the UK politician, who presents himself as a beer-drinking champion of the common man despite being a privately educated former stockbroker.

Until recent months, Milei’s approach – including widespread sell-offs and deep public spending cuts – had won plaudits from the IMF for helping to bring price rises in check. The programme has something in common with the policies of his political hero the former UK prime minister, who also saw rising prices as a monster to be slain, no matter the cost.

But financial markets started to doubt in the government’s agenda in recent months following a shaky result in local polls and multiple corruption scandals. Only large-scale financial intervention by the US has averted what looked set to become a major monetary collapse.

Inconsistencies

The vote for Brexit several years ago arguably had similar reasoning, and its figurehead, Boris Johnson, dismissed concerns about economic detail with confident resolve to implement the “will of the people” despite elite opposition.

Farage to date committed few policies to paper aside from proposals for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to rein in the central bank, perhaps even ditching its governor, the incumbent, with distrust of a stodgy establishment as a central element of the populist package.

His tax and spending policies appear to be unsettled: concerned about facing criticism for planning reckless spending, he lately abandoned a pledge to make significant tax cuts. His Reform party deputy, the party chairman, said they would concentrate instead on public spending cuts.

The opposition hopes this position will enable it to portray Farage as intending to reintroduce fiscal tightening – a point the chancellor has made repeatedly, comparing it unfavorably to her approach of boosting public investment.

Jo Michell says there exist inconsistencies in Farage’s economic programme, as it stands. “The party are bankrolled by very wealthy people demanding lower taxes and deregulation, yet also emphasizing the complaints of working people and the loss in manufacturing employment,” he explains. “There is a conflict here between wealthy supporters seeking radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”

Maintaining Control

In truth, research indicates populists of any stripe tend to fare well when faced with real-world challenges (though of course every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review analysed the performance of dozens of populist leaders, over more than a century. It found typically, over the long term, gross domestic product per head tends to be a tenth less in nations governed by populist rulers compared to comparable countries under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually occur together under populist governments,” argue the paper’s authors.

Another intriguing finding from the study, though, is that despite their economic costs, these leaders tend to be good at retaining office, remaining in power for a considerable time, compared with four for mainstream politicians.

In other words, it is not clear that even when their policies fail, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.

Yet returning to Buenos Aires, whether the government’s agenda collapses or is sustained through foreign assistance, the Argentine people have already paid a heavy price.