Do Populist-Led Governments Inevitably Wreck the Economy?

“Cambio, cambio.” Under the scorching heat, scores of currency traders are offering American currency on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a country accustomed to holding the greenback.

“The optimal moment for purchasing is now,” says one arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Like her, economic experts from all backgrounds anticipate a devaluation of the Argentine peso once the voting concludes. President Javier Milei has imposed a cap on the currency to tame triple-digit price increases and now it remains overvalued and reserves are exhausted, leaving the national economy stagnant as buyers turn to low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. Argentina has been repeatedly hit by debt defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronist movement, and currently the president’s conservative populism.

Milei is a textbook populist: charismatic, unconventional, promising forceful policies to reclaim command of the economy from the establishment for the benefit of ordinary citizens.

These defining traits are also seen in his political partner in the United States, and by the UK politician, who presents himself as a beer-drinking people’s champion despite being a privately educated ex-finance professional.

Up until lately, Milei’s approach – involving widespread sell-offs and severe public spending cuts – had earned praise from the IMF for helping to bring inflation under control. This plan shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a monster to be slain, no matter the cost.

However investors began losing confidence in Milei’s radical project lately following a shaky result in local polls and multiple corruption scandals. Solely massive financial intervention by the US has prevented what looked set to become a major currency crisis.

Inconsistencies

The vote for Brexit several years ago arguably had some of the same logic, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to implement public demand in the face of the establishment’s horror.

Farage to date committed few policies to paper aside from proposals for mass deportations, which he subsequently appeared to revise spontaneously. He wants to curb the central bank, possibly ditching its governor, Andrew Bailey, with scepticism toward traditional institutions as a central element of the populist package.

His tax and spending policies seem unsettled: concerned about being accused of planning reckless spending, he lately abandoned a pledge to make large tax reductions. His Reform party deputy, Richard Tice, stated they would focus instead on public spending cuts.

The opposition hopes this position will enable it to depict Farage as planning to reintroduce fiscal tightening – an argument the chancellor has made repeatedly, comparing it unfavorably to her strategy of increasing government spending.

An economics professor says there exist inconsistencies in Farage’s economic programme, such as it is. “The party are bankrolled by affluent backers demanding lower taxes and reduced rules, yet also emphasizing the grievances of working people and the loss of industrial jobs,” he explains. “There is a conflict here among wealthy supporters seeking radical free-market policies, and this story of restoring British jobs and industrial revival.”

Maintaining Control

Realistically, the evidence suggests populists of any stripe often perform poorly when faced with practical difficulties (although every populist leader claims to offer something unique).

Recent research in the American Economic Review examined the outcomes of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, over the long term, GDP per capita is often 10% lower in nations run by populist leaders than in comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually go hand in hand under populist governments,” argue the paper’s authors.

Another intriguing finding from the study, though, is that even with their negative impacts, populist figures tend to be good at holding on to power, lasting on average eight years, versus shorter tenures for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, populists immediately pay the price in elections. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

But back in Buenos Aires, whether Milei’s populist project collapses or is kept on life support through foreign assistance, the Argentine people have already paid significant costs.