Do Populist Governments Always Crash the Economic System?

“Exchange, exchange.” Beneath the scorching heat, dozens of money changers are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming ahead of the 26 October congressional elections in a nation accustomed to saving in the US dollar.

“The optimal moment to buy is now,” says a arbolito, declining to give her identity. “[The dollar] went down slightly but it is a fake-out – it will rebound.”

Similar to her, economic experts across the spectrum expect a depreciation of the Argentine peso once the voting is over. President Javier Milei has imposed a cap on the currency to control soaring price increases and currently it remains overvalued and reserves are exhausted, leaving the national economy stagnant as consumers opt for cheap imports.

Fertile Ground

Argentina is a very special case. The country has frequently been 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 influential Peronism, and now the president’s conservative populism.

The president epitomizes populist leadership: charismatic, unconventional, vowing forceful measures to reclaim command of the economy 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 presents himself as a beer-drinking people’s champion even though he is a public school-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 contributing to bring inflation in check. The programme shares similarities with the policies of his political hero Margaret Thatcher, who also saw inflation as a monster to be defeated, regardless of the consequences.

However investors began losing confidence in the government’s agenda in recent months after a poor performance in provincial elections and a series of corruption scandals. Only massive economic support by the US has averted what looked set to become a full-blown currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained some of the same logic, and its leader, Boris Johnson, dismissed doubts about economic detail with a bullish determination to enact the “will of the people” in the face of the establishment’s horror.

Farage to date outlined limited plans to paper aside from proposals for large-scale removals, which he subsequently appeared to revise spontaneously. He aims to rein in the Bank of England, perhaps even replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of populist rhetoric.

His tax and spending policies seem in flux: concerned about facing criticism for proposing reckless spending, he lately abandoned a promise for large tax cuts. His Reform party deputy, Richard Tice, stated they would concentrate instead on public spending cuts.

Labour aims this position will allow it to portray Farage as planning to reintroduce austerity – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of increasing public investment.

An economics professor notes there exist inconsistencies within the populist platform, as it stands. “Reform is funded by affluent backers demanding lower taxes and reduced rules, but also talking a lot about the grievances of working people and the decline of industrial jobs,” he says. “There’s a tension here between wealthy supporters who want radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”

Holding on to Power

Realistically, research indicates populists of any stripe tend to fare well when faced with real-world challenges (although each charismatic individual promises distinct solutions).

Recent research from a leading journal analysed 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 nations run by populist leaders compared to comparable countries under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually occur together with populist rule,” contend the paper’s authors.

A further interesting result from the study, though, is that even with their negative impacts, these leaders are often effective at holding on to power, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their attraction extends past everyday financial matters.

But returning to Buenos Aires, regardless of if the government’s agenda fails or is sustained through foreign assistance, Argentina’s citizens are already bearing a heavy price.