Do Populist Governments Inevitably Crash the Economy?

“Exchange, exchange.” Beneath the blazing sun, dozens of currency traders are hawking American currency on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the 26 October midterm elections in a country long used to saving in the greenback.

“The best time to buy is now,” says a arbolito, refusing to provide her name. “[The dollar] dropped slightly but it is a fake-out – it’ll rise again.”

Like her, economic experts from all backgrounds expect a devaluation of the national currency after the voting concludes. The president has placed a limit on the peso to control triple-digit inflation and currently it is artificially high and foreign reserves are exhausted, causing the national economy sluggish as buyers opt for cheap imports.

Ideal Conditions

Argentina represents a unique situation. The country has been repeatedly hit by debt defaults and economic crises and its voters have been susceptible over the years to leftwing populism, in the form of the influential Peronist movement, and now Milei’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, vowing muscular measures to wrestle back command of the economy from traditional elites for the benefit of the people.

These key characteristics are shared by his political partner to the north, as well as the UK politician, who presents himself as a beer-drinking people’s champion even though he is a public school-educated former stockbroker.

Until recent months, Milei’s approach – including extensive privatisations and deep public spending cuts – had earned praise from international lenders for contributing to control price rises in check. The programme shares similarities 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 financial markets began losing confidence in Milei’s radical project in recent months after a poor performance in local polls and a series of corruption scandals. Solely large-scale economic support by the US has averted what seemed destined to be a full-blown currency crisis.

Contradictions

The vote for Brexit in 2016 arguably had similar reasoning, and its figurehead, Boris Johnson, dismissed concerns regarding fiscal impacts with a bullish determination to implement public demand in the face of elite opposition.

Farage has so far outlined limited plans to paper except for proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He aims to rein in the Bank of England, possibly replacing its head, Andrew Bailey, 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 proposing a Liz Truss-style splurge, he lately dropped a pledge to make significant tax reductions. His second-in-command, the party chairman, said they would concentrate instead on reductions in government expenditure.

Labour hopes this stance will enable it to portray Farage as planning to bring back fiscal tightening – a point Rachel Reeves has emphasized often, comparing it unfavorably to her strategy of increasing government spending.

Jo Michell notes there are contradictions within the populist platform, as it stands. “The party is funded by affluent backers calling for tax cuts and reduced rules, yet also emphasizing the grievances of ordinary workers and the decline in manufacturing employment,” he says. “There is a conflict there between rich backers seeking radical free-market policies, and this narrative of restoring UK employment and industrial revival.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well when confronting practical difficulties (although every populist leader claims to offer something unique).

Recent research from a leading journal analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found typically, over the long term, gross domestic product per head is often a tenth less in countries governed by populist leaders compared to similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually occur together under populist governments,” argue the paper’s authors.

Another intriguing finding from the study, however, is that even with their negative impacts, these leaders are often effective at holding on to power, lasting on average eight years, compared with four for mainstream politicians.

Put simply, it remains uncertain that even when their plans crash, such leaders immediately pay the price in elections. Similar to pledges made to regain sovereignty, their appeal reaches beyond everyday financial matters.

Yet returning to Buenos Aires, regardless of if the government’s agenda collapses or is sustained by external aid, the Argentine people are already bearing a heavy price.