Can Populist-Led Governments Inevitably Wreck the Economy?

“Cambio, cambio.” Under the blazing sun, dozens of money changers are offering US dollars on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the 26 October midterm elections in a country accustomed to holding the greenback.

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

Like her, economic experts across the spectrum expect a depreciation of the national currency after the voting concludes. President Javier Milei has placed a cap on the peso to control soaring inflation and currently it is artificially high and foreign reserves are exhausted, causing Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Fertile Ground

The nation represents a unique situation. Argentina has frequently been hit by debt defaults and financial turmoil and its voters have been receptive for decades to left-leaning populist movements, such as the influential Peronist movement, and now the president’s conservative populism.

The president is a textbook populist: captivating, unconventional, vowing forceful measures to reclaim control of the economy from the establishment for the benefit of ordinary citizens.

These defining traits are shared by his political partner in the United States, as well as Nigel Farage, who styles himself as a pint-swilling champion of the common man despite being a public school-educated former stockbroker.

Until recent months, Milei’s approach – including widespread sell-offs and deep budget reductions – had earned praise from international lenders for contributing to bring inflation under control. This plan shares similarities with the policies of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be slain, no matter the cost.

But financial markets started to doubt in Milei’s radical project in recent months following a shaky result in provincial elections and a series of graft allegations. Only massive financial intervention by the US has averted what looked set to become a full-blown currency crisis.

Inconsistencies

The 2016 referendum several years ago likely contained some of the same logic, and its figurehead, Boris Johnson, dismissed doubts regarding fiscal impacts with confident resolve to enact the “will of the people” despite the establishment’s horror.

Farage has so far committed few policies in writing except for a call for mass deportations, that he later appeared to revise spontaneously. He aims to rein in the central bank, possibly ditching its governor, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His fiscal plans appear to be in flux: wary of facing criticism for planning reckless spending, he recently dropped a pledge to make large tax reductions. His second-in-command, the party chairman, stated they would focus instead on public spending cuts.

Labour aims this position will allow it to depict Farage as intending to reintroduce fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with 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 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 narrative of bringing back UK employment and industrial revival.”

Maintaining Control

In truth, research suggests populists of any stripe tend to fare well when confronting practical difficulties (although every populist leader promises something unique).

A recent paper in the American Economic Review examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, GDP per capita is often a tenth less in countries run by populist leaders than in comparable countries under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually occur together with populist rule,” contend the researchers.

A further interesting result of the research, though, is even with their negative impacts, populist figures tend to be good at retaining office, remaining in power for a considerable time, compared with shorter tenures for mainstream politicians.

Put simply, it remains uncertain that even when their plans crash, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

But returning to Buenos Aires, whether Milei’s populist project collapses or is sustained by external aid, the Argentine people are already bearing a heavy price.