Can Populist-Led Governments Inevitably Wreck the Economy?

“Cambio, cambio.” Beneath the blazing sun, dozens of money changers are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the October 26 congressional elections in a nation long used to saving in the US dollar.

“The optimal moment for purchasing is currently,” says one arbolito, refusing to provide her name. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Similar to her, economists across the spectrum expect a devaluation of the Argentine peso after the voting concludes. President Javier Milei has imposed a limit on the currency to control triple-digit price increases and now it remains overvalued and reserves are exhausted, causing Argentina’s economy stagnant as buyers opt for cheap imports.

Fertile Ground

Argentina is a very special case. Argentina has frequently been hit by debt defaults and financial turmoil and the electorate have been receptive for decades to leftwing populism, such as the influential Peronism, and now Milei’s conservative populism.

Milei is a textbook populist: captivating, iconoclastic, vowing forceful measures to reclaim command of economic management from traditional elites on behalf of the people.

These key characteristics are also seen in his political partner in the United States, and by the UK politician, who styles himself as a beer-drinking people’s champion despite being a public school-educated former stockbroker.

Until recent months, Milei’s approach – involving extensive privatisations and deep budget reductions – had earned praise from international lenders for helping to bring inflation in check. The programme has something in common with the policies of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, no matter the cost.

However investors began losing confidence in the government’s agenda lately after a shaky result in local polls and a series of graft allegations. Only large-scale economic support from abroad has prevented what seemed destined to be a major monetary collapse.

Inconsistencies

The 2016 referendum in 2016 arguably had similar reasoning, and its leader, the former prime minister, swept away concerns regarding fiscal impacts with confident resolve to enact the “will of the people” despite the establishment’s horror.

The Reform leader to date outlined limited plans to paper except for a call for mass deportations, that he later appeared to revise spontaneously. He aims to rein in the Bank of England, possibly ditching its governor, the incumbent, with scepticism of a stodgy establishment as a central element of the populist package.

His fiscal plans appear to be unsettled: concerned about facing criticism for planning reckless spending, he recently dropped a promise to make significant tax cuts. His second-in-command, the party chairman, stated they would focus instead on reductions in government expenditure.

Labour aims this position will enable it to portray the populist as planning to reintroduce austerity – a point the chancellor has emphasized often, comparing it unfavorably to her approach of increasing public investment.

Jo Michell says there are contradictions in Farage’s economic programme, as it stands. “The party is funded by affluent backers calling for tax cuts and deregulation, but also talking a lot about the complaints of working people and the loss in manufacturing employment,” he explains. “There’s a tension here among wealthy supporters seeking Thatcherism on steroids, and this story of restoring British jobs and industrial revival.”

Holding on to Power

Realistically, research suggests populists of any stripe often perform poorly when faced with real-world challenges (though of course each charismatic individual promises something unique).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found typically, after 15 years, GDP per capita tends to be 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 usually go hand in hand with populist rule,” contend the researchers.

A further interesting result of the research, though, is that even with their negative impacts, these leaders are often effective at retaining office, remaining in power for a considerable time, compared with four for mainstream politicians.

In other words, it is not clear that even when their policies fail, such leaders immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their attraction extends past mundane economics.

But back in Buenos Aires, regardless of if the government’s agenda fails or is sustained through foreign assistance, Argentina’s citizens have already paid significant costs.