Do Populist Governments Always Wreck the Economy?

“Exchange, exchange.” Under the scorching heat, scores of currency traders are selling US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the October 26 congressional elections in a country accustomed to holding the US dollar.

“The best time for purchasing is currently,” says a arbolito, declining to give her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economic experts from all backgrounds expect a depreciation of the Argentine peso once the voting concludes. The president has placed a cap on the peso to control soaring inflation and now it remains overvalued and reserves are exhausted, leaving the national economy sluggish as consumers opt for cheap imports.

Fertile Ground

Argentina is a very special case. Argentina has frequently been hit by sovereign defaults and economic crises and its voters have been susceptible over the years to leftwing populism, such as the influential Peronist movement, and now Milei’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, vowing forceful measures to wrestle back control of the economy from the establishment on behalf of ordinary citizens.

These key characteristics are also seen in his political partner to the north, as well as Nigel Farage, who presents himself as a pint-swilling champion of the common man despite being a public school-educated former stockbroker.

Until recent months, Milei’s approach – including widespread sell-offs and severe budget reductions – had won plaudits from the IMF for helping to control inflation under control. 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 slain, regardless of the consequences.

However financial markets began losing confidence in the government’s agenda lately after a poor performance in local polls and multiple graft allegations. Solely large-scale economic support by the US has averted what seemed destined to be 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, swept away doubts about economic detail with a bullish determination to implement public demand despite elite opposition.

The Reform leader to date committed few policies to paper except for a call for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to rein in the Bank of England, possibly ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans appear to be in flux: concerned about being accused of planning a Liz Truss-style splurge, he recently dropped a pledge to make large tax cuts. His second-in-command, the party chairman, said they would concentrate instead on public spending cuts.

The opposition hopes this stance will enable it to portray Farage as intending to bring back fiscal tightening – an argument Rachel Reeves has emphasized often, contrasting it with her approach of increasing public investment.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for tax cuts and deregulation, yet also talking a lot about the grievances of working people and the decline in manufacturing employment,” he says. “There is a conflict here between wealthy supporters who want radical free-market policies, and this story of bringing back UK employment and industrial revival.”

Maintaining Control

In truth, the evidence suggests populists of any stripe often perform poorly when confronting real-world challenges (though of course each charismatic individual claims to offer something unique).

Recent research in the American Economic Review 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 10% lower in countries run by populist rulers than in comparable countries under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” argue the paper’s authors.

A further interesting result of the research, however, is even with their negative impacts, these leaders tend to be good at retaining office, remaining in power for a considerable time, compared with four for their more moderate equivalents.

Put simply, it remains uncertain that even when their plans crash, populists face immediate consequences in elections. Similar to pledges made to “take back control”, their attraction extends past everyday financial matters.

Yet returning to Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support through foreign assistance, the Argentine people have already paid significant costs.