Do Populist Governments Inevitably Crash the Economic System?

“Dollars, dollars.” Under the blazing sun, dozens of money changers are hawking American currency on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a nation long used to saving in the US dollar.

“The best time for purchasing is currently,” says one arbolito, declining to give her identity. “[The dollar] dropped a little but it’s deceptive – it will rebound.”

Similar to her, economists across the spectrum expect a devaluation of the Argentine peso once the voting concludes. The president has placed a cap on the currency to tame soaring inflation and now it remains overvalued and foreign reserves are depleted, leaving Argentina’s economy stagnant as buyers turn to low-cost foreign goods.

Fertile Ground

Argentina is a very special case. The country has frequently been racked by sovereign defaults and financial turmoil and its voters have been susceptible for decades to leftwing populism, such as the powerful Peronist movement, and currently the president’s conservative populism.

Milei epitomizes populist leadership: captivating, unconventional, vowing muscular measures to reclaim command of economic management 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 the UK politician, who presents himself as a beer-drinking people’s champion despite being a privately educated ex-finance professional.

Up until lately, Milei’s approach – including extensive privatisations and severe budget reductions – had won plaudits from international lenders for contributing to bring price rises in check. The programme has something in common with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a dragon to be defeated, regardless of the consequences.

However financial markets began losing confidence in the government’s agenda lately following a poor performance in provincial elections and a series of graft allegations. Solely large-scale economic support by the US has averted what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its figurehead, Boris Johnson, dismissed concerns about economic detail with confident resolve to enact public demand in the face of elite opposition.

Farage to date outlined limited plans to paper aside from proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He wants to curb the Bank of England, possibly replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of the populist package.

His fiscal plans seem unsettled: wary of facing criticism for planning reckless spending, he lately abandoned a pledge to make significant tax reductions. His Reform party deputy, Richard Tice, stated they would focus instead on reductions in government expenditure.

The opposition aims this stance will enable it to depict Farage as planning to reintroduce austerity – a point Rachel Reeves has emphasized often, contrasting it with her approach of increasing public investment.

Jo Michell says there are contradictions within the populist platform, such as it is. “The party are bankrolled by very wealthy people calling for lower taxes and reduced rules, but also talking a lot about the grievances of working people and the loss in manufacturing employment,” he says. “There is a conflict there between wealthy supporters seeking radical free-market policies, and this narrative of restoring British jobs and reindustrialisation.”

Holding on to Power

Realistically, research indicates neither left nor right populists often perform poorly when faced with real-world challenges (though of course every populist leader promises something unique).

A recent paper from a leading journal examined the performance of dozens of populist leaders, from 1900 to 2020. It found that on average, after 15 years, GDP per capita tends to be a tenth less in nations governed by populist leaders compared to similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically occur together with populist rule,” argue the researchers.

A further interesting result of the research, however, is that even with their negative impacts, populist figures are often effective at retaining office, lasting on average eight years, versus shorter tenures for mainstream politicians.

In other words, 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 appeal reaches beyond everyday financial matters.

Yet back in Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, Argentina’s citizens are already bearing significant costs.