Can Populist Governments Always Wreck the Economy?

“Cambio, cambio.” Beneath the blazing sun, dozens of currency traders are hawking US dollars on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving before the October 26 midterm elections in a nation accustomed to holding the greenback.

“The best time for purchasing is now,” states a arbolito, declining to give her name. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Like her, economists from all backgrounds expect a depreciation of the Argentine peso after the election concludes. The president has placed a limit on the peso to control soaring price increases and now it remains artificially high and foreign reserves are depleted, leaving Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Fertile Ground

Argentina is a very special case. The country has been repeatedly hit by sovereign defaults and financial turmoil and its voters have been susceptible for decades to left-leaning populist movements, such as the powerful Peronism, and now the president’s conservative populism.

Milei epitomizes populist leadership: charismatic, iconoclastic, promising muscular policies to reclaim control of economic management from the establishment on behalf of the people.

These key characteristics are also seen in his ally 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 former stockbroker.

Up until lately, Milei’s approach – including extensive privatisations and severe public spending cuts – had won plaudits from international lenders for helping to bring inflation under control. This plan shares similarities with the policies of Milei’s idol the former UK prime minister, who similarly viewed inflation as a dragon to be slain, no matter the cost.

But financial markets started to doubt in the government’s agenda lately following a poor performance in local polls and a series of graft allegations. Only massive economic support from abroad has averted what seemed destined to be a major monetary collapse.

Inconsistencies

The vote for Brexit in 2016 arguably had some of the same logic, and its figurehead, Boris Johnson, dismissed concerns about economic detail with a bullish determination to enact the “will of the people” in the face of elite opposition.

The Reform leader has so far outlined limited plans to paper aside from proposals for mass deportations, that he later appeared to revise spontaneously. He aims to curb the Bank of England, possibly ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment being a key part of populist rhetoric.

His fiscal plans appear to be in flux: concerned about being accused of proposing reckless spending, he recently dropped a promise for significant tax cuts. His second-in-command, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

Labour hopes this position will allow it to portray Farage as planning to bring back fiscal tightening – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of boosting public investment.

An economics professor notes there exist inconsistencies within the populist platform, as it stands. “The party is funded by very wealthy people calling for lower taxes and deregulation, yet also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he says. “There is a conflict here between rich backers seeking radical free-market policies, and this narrative of restoring British jobs and reindustrialisation.”

Holding on to Power

In truth, the evidence indicates populists of any stripe often perform poorly when faced with real-world challenges (although every populist leader promises distinct solutions).

A recent paper from a leading journal examined the outcomes of dozens of populist leaders, over more than a century. The study revealed typically, over the long term, GDP per capita is often a tenth less in countries run by populist rulers than in comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” argue the researchers.

Another intriguing finding of the research, though, is that despite their economic costs, these leaders tend to be good at holding on to power, lasting on average eight years, versus four for their more moderate equivalents.

In other words, it is not clear whether even if their plans crash, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond everyday financial matters.

Yet back in Buenos Aires, regardless of if the government’s agenda collapses or is sustained through foreign assistance, the Argentine people have already paid significant costs.