Do Populist Governments Always Wreck the Economy?

“Dollars, dollars.” Under the scorching heat, scores of currency traders are hawking US dollars on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the October 26 midterm elections in a country long used to holding the greenback.

“The optimal moment to buy is currently,” says a arbolito, refusing to provide her name. “[The dollar] went down a little but it is a fake-out – it will rebound.”

Like her, economic experts across the spectrum anticipate a devaluation of the Argentine peso once the election concludes. The president has imposed a limit on the currency to tame triple-digit price increases and now it remains overvalued and reserves are exhausted, leaving Argentina’s economy stagnant as consumers opt for low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. Argentina has frequently been racked by debt defaults and financial turmoil and the electorate have been receptive for decades to leftwing populism, in the form of the influential Peronism, and now the president’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, promising forceful measures to reclaim command of the economy from the establishment on behalf of ordinary citizens.

These defining traits are shared by his ally in the United States, and by the UK politician, who presents himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.

Up until lately, the president’s strategy – involving widespread sell-offs and deep budget reductions – had won plaudits from the IMF for contributing to control price rises under control. This plan has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed inflation as a dragon to be defeated, no matter the cost.

But investors began losing confidence in Milei’s radical project lately after a shaky result in local polls and a series of graft allegations. Solely large-scale financial intervention from abroad has prevented what looked set to become a major currency crisis.

Contradictions

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, swept away concerns about economic detail with a bullish determination to implement public demand despite elite opposition.

The Reform leader to date committed few policies to paper except for proposals for mass deportations, that he later appeared to revise on the hoof. He aims to rein in the central bank, possibly ditching its governor, the incumbent, with distrust 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 dropped a pledge to make significant tax reductions. His second-in-command, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

Labour aims this stance will enable it to depict Farage as planning to reintroduce fiscal tightening – an argument the chancellor has emphasized often, contrasting it with her approach of boosting government spending.

Jo Michell notes there are contradictions in Farage’s economic programme, as it stands. “Reform are bankrolled by very wealthy people calling for tax cuts and deregulation, yet also talking a lot about the grievances of working people and the loss in manufacturing employment,” he explains. “There is a conflict there between rich backers seeking Thatcherism on steroids, and this narrative of restoring UK employment and reindustrialisation.”

Holding on to Power

In truth, the evidence suggests populists of any stripe tend to fare well when faced with real-world challenges (though of course each charismatic individual promises distinct solutions).

A recent paper in the American Economic Review examined the outcomes of dozens of populist leaders, over more than a century. It found typically, over the long term, gross domestic product per head tends to be 10% lower in nations run by populist rulers than in similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance usually occur together under populist governments,” contend the researchers.

Another intriguing finding of the research, though, is even with their negative impacts, populist figures tend to be good at holding on to power, lasting on average a considerable time, versus shorter tenures for mainstream politicians.

Put simply, it remains uncertain whether even if their plans crash, such leaders face immediate consequences in elections. Similar to pledges made to “take back control”, their appeal reaches beyond everyday financial matters.

But returning to Buenos Aires, whether Milei’s populist project fails or is kept on life support by external aid, the Argentine people have already paid significant costs.