Do Populist-Led Governments Inevitably Crash the Economic System?

“Cambio, cambio.” Beneath the scorching heat, scores of currency traders are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a country accustomed to saving in the US dollar.

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

Similar to her, economic experts from all backgrounds anticipate a depreciation of the national currency after the election is over. President Javier Milei has imposed a limit on the currency to control triple-digit price increases and now it is overvalued and reserves are exhausted, causing Argentina’s economy stagnant as consumers opt for low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. Argentina has been repeatedly hit by sovereign defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, such as the powerful Peronism, and now the president’s conservative populism.

The president is a textbook populist: captivating, unconventional, promising muscular measures to reclaim control of the economy from the establishment on behalf of the people.

These defining traits are shared by his political partner in the United States, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man despite being a privately educated ex-finance professional.

Until recent months, the president’s strategy – involving widespread sell-offs and deep budget reductions – had won plaudits from international lenders for contributing to bring inflation in check. The programme has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be defeated, regardless of the consequences.

However financial markets started to doubt in Milei’s radical project in recent months after a shaky result in local polls and multiple corruption scandals. Solely massive financial intervention by the US has averted what seemed destined to be a major monetary collapse.

Contradictions

The 2016 referendum several years ago likely contained similar reasoning, and its leader, the former prime minister, dismissed concerns about economic detail with a bullish determination to enact the “will of the people” despite elite opposition.

Farage has so far outlined limited plans in writing except for proposals for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to rein in the central bank, perhaps even replacing its head, the incumbent, with distrust toward traditional institutions being a key part of populist rhetoric.

His fiscal plans seem unsettled: concerned about being accused of proposing reckless spending, he recently dropped a pledge to make large tax cuts. His second-in-command, Richard Tice, said they would concentrate instead on public spending cuts.

The opposition hopes this stance will enable it to depict the populist as planning to reintroduce austerity – a point Rachel Reeves has emphasized often, comparing it unfavorably to her approach of boosting government spending.

Jo Michell says there are contradictions within the populist platform, such as it is. “Reform are bankrolled by affluent backers calling for lower taxes and reduced rules, yet also talking a lot about the grievances of working people and the decline of industrial jobs,” he says. “There’s a tension there among rich backers seeking radical free-market policies, and this narrative of restoring British jobs and reindustrialisation.”

Maintaining Control

In truth, the evidence suggests populists of any stripe often perform poorly when faced with practical difficulties (although each charismatic individual promises something unique).

Recent research in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, after 15 years, gross domestic product per head is often a tenth less in nations governed by populist leaders than in comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually go hand in hand under populist governments,” contend the paper’s authors.

A further interesting result of the research, however, is that despite their economic costs, populist figures are often effective at holding on to power, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.

In other words, it is not clear that even when their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal extends past everyday financial matters.

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