Do Populist-Led Governments Always Crash the Economic System?

“Cambio, cambio.” Beneath the blazing sun, dozens of money changers are selling American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a nation long used to holding the greenback.

“The best time for purchasing is currently,” says one arbolito, declining to give her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Like her, economists from all backgrounds expect a depreciation of the Argentine peso after the voting is over. The president has imposed a cap on the peso to control triple-digit price increases and currently it remains artificially high and foreign reserves are exhausted, causing Argentina’s economy sluggish as consumers 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 receptive over the years to left-leaning populist movements, in the form of the influential Peronism, and currently the president’s rightwing version.

The president is a textbook populist: charismatic, iconoclastic, vowing forceful measures to reclaim command of economic management from traditional elites for the benefit of the people.

These defining traits are also seen in his political partner in the United States, and by Nigel Farage, who styles himself as a beer-drinking champion of the common man despite being a privately educated former stockbroker.

Until recent months, the president’s strategy – involving widespread sell-offs and severe budget reductions – had earned praise from the IMF for contributing to bring inflation in check. The programme has something in common with the policies of his political hero Margaret Thatcher, who also saw rising prices as a monster to be defeated, no matter the cost.

However financial markets started to doubt in Milei’s radical project lately after a poor performance in provincial elections and multiple graft allegations. Solely large-scale economic support by the US has prevented what looked set to become a major currency crisis.

Inconsistencies

The vote for Brexit in 2016 arguably had some of the same logic, and its leader, the former prime minister, swept away doubts regarding fiscal impacts with a bullish determination to enact the “will of the people” in the face of elite opposition.

The Reform leader to date committed few policies in writing except for a call for large-scale removals, that he later appeared to revise spontaneously. He wants to rein in the central bank, perhaps even replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of populist rhetoric.

His tax and spending policies seem in flux: wary of facing criticism for planning a Liz Truss-style splurge, he recently dropped a promise for large tax reductions. His second-in-command, Richard Tice, stated they would concentrate instead on public spending cuts.

Labour hopes this stance will allow it to depict the populist as intending to bring back austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her strategy of boosting public investment.

An economics professor notes there exist inconsistencies in Farage’s economic programme, such as it is. “The party are bankrolled by very wealthy people demanding tax cuts and reduced rules, yet also talking a lot about the complaints of working people and the decline in manufacturing employment,” he explains. “There’s a tension here between rich backers who want Thatcherism on steroids, and this narrative of bringing back British jobs and reindustrialisation.”

Maintaining Control

Realistically, research indicates populists of any stripe tend to fare well when faced with practical difficulties (though of course every populist leader promises distinct solutions).

A recent paper in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, after 15 years, GDP per capita tends to be 10% lower in countries run by populist leaders than in comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually occur together with populist rule,” contend the paper’s authors.

A further interesting result from the study, however, is that even with their negative impacts, these leaders are often effective at retaining office, lasting on average a considerable time, versus four for their more moderate equivalents.

Put simply, it remains uncertain whether even if their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

But back in Buenos Aires, regardless of if Milei’s populist project fails or is sustained by external aid, Argentina’s citizens have already paid significant costs.