Do Populist-Led Governments Inevitably Crash the Economy?

“Dollars, dollars.” Beneath the scorching heat, dozens of money changers are offering American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the October 26 congressional elections in a nation accustomed to saving in the greenback.

“The optimal moment for purchasing is currently,” states one arbolito, declining to give her identity. “[The dollar] went down a little but it is a fake-out – it will rebound.”

Similar to her, economic experts across the spectrum expect a devaluation of the Argentine peso once the voting is over. The president has imposed a cap on the currency to tame triple-digit inflation and currently it remains artificially high and reserves are exhausted, causing Argentina’s economy stagnant as consumers turn to low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. The country has been repeatedly racked by sovereign defaults and financial turmoil and its voters have been susceptible for decades to leftwing populism, in the form of the influential Peronism, and now the president’s conservative populism.

The president is a textbook populist: charismatic, unconventional, promising muscular measures to reclaim control of economic management from traditional elites for the benefit of the people.

These key characteristics are shared by his political partner to the north, and by Nigel Farage, who styles himself as a pint-swilling people’s champion despite being a privately educated former stockbroker.

Until recent months, the president’s strategy – involving extensive privatisations and deep budget reductions – had won plaudits from the IMF for helping to control inflation in check. This plan has something in common with the policies of Milei’s idol Margaret Thatcher, who also saw rising prices as a dragon to be slain, regardless of the consequences.

However investors 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 prevented what looked set to become a major monetary collapse.

Contradictions

The 2016 referendum several years ago arguably had some of the same logic, and its leader, the former prime minister, dismissed concerns regarding fiscal impacts with confident resolve to enact public demand in the face of the establishment’s horror.

The Reform leader to date outlined limited plans in writing except for proposals for mass deportations, that he later seemed to adjust on the hoof. He wants to curb the Bank of England, perhaps even ditching its governor, the incumbent, with scepticism of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies appear to be in flux: concerned about being accused of planning a Liz Truss-style splurge, he recently abandoned a pledge to make large tax cuts. His Reform party deputy, the party chairman, stated they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will allow it to portray Farage as planning to reintroduce fiscal tightening – an argument the chancellor has made repeatedly, comparing it unfavorably to her strategy of increasing government spending.

An economics professor says there are contradictions within the populist platform, such as it is. “The party are bankrolled by very wealthy people calling for tax cuts and deregulation, yet also talking a lot about the complaints of working people and the loss of industrial jobs,” he says. “There is a conflict there between wealthy supporters seeking Thatcherism on steroids, and this story of restoring UK employment and industrial revival.”

Maintaining Control

Realistically, research suggests neither left nor right populists tend to fare well when confronting practical difficulties (though of course every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, GDP per capita tends to be a tenth less in nations run by populist rulers compared to comparable countries with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually occur together with populist rule,” argue the paper’s authors.

Another intriguing finding of the research, though, is that even with their negative impacts, populist figures tend to be good at retaining office, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.

Put simply, it is not clear whether even if their policies fail, populists immediately pay the price at the ballot box. Similar to pledges made to “take back control”, their attraction extends past everyday financial matters.

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