Can Populist Governments Always Crash the Economy?
“Cambio, cambio.” Beneath the blazing sun, scores of currency traders are offering American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the 26 October congressional elections in a nation accustomed to holding the US dollar.
“The optimal moment for purchasing is now,” states one arbolito, declining to give her name. “[The dollar] dropped a little but it is a fake-out – it will rebound.”
Like her, economic experts from all backgrounds anticipate a devaluation of the national currency once the voting concludes. President Javier Milei has imposed a cap on the peso to tame soaring price increases and currently it is artificially high and reserves are depleted, leaving Argentina’s economy sluggish as buyers opt for cheap imports.
Ideal Conditions
Argentina represents a unique situation. Argentina has been repeatedly racked by debt defaults and economic crises and the electorate have been receptive over the years to left-leaning populist movements, in the form of the powerful Peronist movement, and currently the president’s conservative populism.
Milei is a textbook populist: charismatic, iconoclastic, promising muscular measures to reclaim control of economic management from traditional elites on behalf of ordinary citizens.
These key characteristics are also seen in his ally in the United States, as well as the UK politician, who styles himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.
Up until lately, the president’s strategy – including extensive privatisations and deep budget reductions – had won plaudits from international lenders for helping to control price rises under control. This plan has something in common with that of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a monster to be defeated, regardless of the consequences.
However financial markets began losing confidence in Milei’s radical project in recent months after a shaky result in provincial elections and a series of graft allegations. Solely massive financial intervention by the US has prevented what seemed destined to be a major currency crisis.
Inconsistencies
The 2016 referendum several years ago arguably had some of the same logic, and its figurehead, the former prime minister, swept away concerns regarding fiscal impacts with a bullish determination to implement public demand despite elite opposition.
Farage to date committed few policies to paper aside from a call for large-scale removals, which he subsequently appeared to revise spontaneously. He wants to curb the Bank of England, possibly ditching its governor, Andrew Bailey, with scepticism toward traditional institutions as a central element of the populist package.
His fiscal plans appear to be in flux: concerned about facing criticism for proposing a Liz Truss-style splurge, he recently dropped a promise for large tax cuts. His Reform party deputy, Richard Tice, stated they would focus instead on reductions in government expenditure.
Labour aims this position will allow it to depict the populist as intending to reintroduce fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with her strategy of boosting public investment.
An economics professor says there exist inconsistencies in Farage’s economic programme, such as it is. “Reform are bankrolled by affluent backers calling for lower taxes and deregulation, yet also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he explains. “There’s a tension here between wealthy supporters seeking Thatcherism on steroids, and this story of bringing back UK employment and industrial revival.”
Maintaining Control
In truth, the evidence indicates populists of any stripe tend to fare well when faced with practical difficulties (although every populist leader claims to offer something unique).
Recent research in the American Economic Review examined the performance of dozens of populist leaders, over more than a century. The study revealed that on average, after 15 years, gross domestic product per head tends to be a tenth less in countries run by populist leaders than in similar economies with more mainstream regimes.
“Financial decline, decreasing macroeconomic stability and the decay of governance typically occur together with populist rule,” argue the paper’s authors.
A further interesting result of the research, however, is that even with their negative impacts, these leaders are often effective at holding on to power, remaining in power for eight years, versus four for their more moderate equivalents.
Put simply, it remains uncertain whether even if their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal extends past mundane economics.
But returning to Buenos Aires, whether the government’s agenda fails or is sustained by external aid, Argentina’s citizens have already paid significant costs.
