Can Populist Governments Always Crash the Economic System?

“Exchange, exchange.” Under the scorching heat, dozens of money changers are selling American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the October 26 midterm elections in a nation long used to holding the greenback.

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

Similar to her, economic experts across the spectrum anticipate a devaluation of the national currency after the election concludes. The president has imposed a limit on the peso to control soaring inflation and currently it remains artificially high and reserves are depleted, causing the national economy stagnant as consumers opt for cheap imports.

Fertile Ground

Argentina represents a unique situation. Argentina has been repeatedly racked by debt defaults and financial turmoil and its voters have been receptive for decades to left-leaning populist movements, in the form of the powerful Peronism, and currently Milei’s conservative populism.

Milei epitomizes populist leadership: charismatic, unconventional, promising forceful measures to wrestle back control of economic management from the establishment on behalf of ordinary citizens.

These defining traits are shared by his ally to the north, as well as Nigel Farage, who presents himself as a pint-swilling champion of the common man despite being a public school-educated ex-finance professional.

Up until lately, Milei’s approach – involving widespread sell-offs and severe budget reductions – had earned praise from international lenders for helping to bring inflation in check. The programme shares similarities with that of Milei’s idol the former UK prime minister, who also saw rising prices as a monster to be defeated, regardless of the consequences.

But investors started to doubt in the government’s agenda lately following a poor performance in provincial elections and a series of corruption scandals. Solely large-scale financial intervention from abroad has averted what seemed destined to be a major currency crisis.

Contradictions

The 2016 referendum in 2016 arguably had some of the same logic, and its figurehead, Boris Johnson, dismissed concerns regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of the establishment’s horror.

The Reform leader to date outlined limited plans in writing aside from proposals for large-scale removals, that he later appeared to revise spontaneously. He aims to curb the central bank, possibly ditching its governor, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His fiscal plans seem in flux: concerned about facing criticism for planning reckless spending, he lately dropped a promise for significant tax cuts. His second-in-command, the party chairman, stated they would concentrate instead on public spending cuts.

Labour hopes this position will enable it to portray Farage as planning to reintroduce fiscal tightening – an argument the chancellor has emphasized often, contrasting it with her strategy of boosting public investment.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for lower taxes and reduced rules, but also emphasizing the grievances of ordinary workers and the decline in manufacturing employment,” he says. “There is a conflict here between rich backers who want radical free-market policies, and this narrative of bringing back UK employment and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well when confronting practical difficulties (though of course each charismatic individual promises distinct solutions).

A recent paper in the American Economic Review examined the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, after 15 years, GDP per capita is often 10% lower in nations run by populist rulers than in similar economies under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” contend the paper’s authors.

A further interesting result from the study, however, is despite their economic costs, populist figures tend to be good at holding on to power, lasting on average eight years, compared with four for mainstream politicians.

Put simply, it remains uncertain whether even if their policies fail, such leaders face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

Yet back in Buenos Aires, whether the government’s agenda fails or is kept on life support by external aid, the Argentine people have already paid significant costs.