Do Populist-Led Governments Always Crash the Economic System?

“Dollars, dollars.” Beneath the scorching heat, dozens of money changers are hawking US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the 26 October midterm elections in a country long used to saving in the greenback.

“The best time to buy is currently,” says a arbolito, declining to give her identity. “[The dollar] dropped slightly but it’s deceptive – it’ll rise again.”

Like her, economists across the spectrum expect a devaluation of the national currency once the election concludes. The president has imposed a limit on the peso to control triple-digit price increases and now it remains artificially high and reserves are exhausted, causing Argentina’s economy stagnant as buyers turn to low-cost foreign goods.

Fertile Ground

The nation represents a unique situation. Argentina has been repeatedly hit by debt defaults and economic crises and its voters have been receptive for decades to leftwing populism, in the form of the influential Peronism, and now the president’s rightwing version.

Milei epitomizes populist leadership: charismatic, unconventional, promising muscular measures to reclaim control of economic management from traditional elites on behalf of ordinary citizens.

These key characteristics are also seen in his ally in the United States, as well as Nigel Farage, who styles himself as a pint-swilling people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, the president’s strategy – involving widespread sell-offs and deep public spending cuts – had won plaudits from international lenders for helping to bring inflation in check. The programme shares similarities with that of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a dragon to be slain, no matter the cost.

But investors started to doubt in the government’s agenda in recent months after a shaky result in provincial elections and multiple graft allegations. Solely large-scale financial intervention from abroad has averted what looked set to become a major monetary collapse.

Inconsistencies

The vote for Brexit several years ago likely contained some of the same logic, and its figurehead, the former prime minister, dismissed doubts about economic detail with a bullish determination to implement public demand in the face of elite opposition.

Farage to date committed few policies in writing aside from proposals for mass deportations, which he subsequently seemed to adjust spontaneously. He aims to curb the Bank of England, perhaps even ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment as a central element of the populist package.

His tax and spending policies seem in flux: wary of being accused of planning reckless spending, he recently abandoned a promise to make large tax reductions. His second-in-command, the party chairman, said they would concentrate instead on reductions in government expenditure.

Labour aims this position will enable it to portray the populist as intending to reintroduce fiscal tightening – an argument the chancellor has made repeatedly, comparing it unfavorably to her strategy of boosting public investment.

Jo Michell notes there exist inconsistencies within the populist platform, as it stands. “The party is funded by very wealthy people calling for lower taxes and reduced rules, but also emphasizing the grievances of working people and the loss in manufacturing employment,” he explains. “There’s a tension there among rich backers who want radical free-market policies, and this narrative of restoring UK employment and reindustrialisation.”

Holding on to Power

Realistically, research indicates neither left nor right populists tend to fare well when confronting real-world challenges (although every populist leader promises something unique).

Recent research in the American Economic Review examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, after 15 years, GDP per capita tends to be 10% lower in countries governed by populist rulers than in similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance typically occur together under populist governments,” contend the researchers.

A further interesting result of the research, however, is despite their economic costs, populist figures are often effective at retaining office, remaining in power for eight years, versus shorter tenures for mainstream politicians.

Put simply, it is not clear that even when their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal reaches beyond mundane economics.

Yet returning to Buenos Aires, whether the government’s agenda collapses or is kept on life support by external aid, Argentina’s citizens are already bearing significant costs.