Do Populist Governments Inevitably Crash the Economy?

“Dollars, dollars.” Under the blazing sun, dozens of money changers are offering US dollars on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a nation accustomed to saving in the greenback.

“The optimal moment to buy is now,” says a arbolito, declining to give her name. “[The dollar] dropped a little but it is a fake-out – it will rebound.”

Like her, economists across the spectrum expect a depreciation of the Argentine peso once the voting concludes. The president has placed a cap on the peso to tame soaring inflation and now it remains artificially high and foreign reserves are exhausted, causing the national economy sluggish as consumers turn to low-cost foreign goods.

Ideal Conditions

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

Milei is a textbook populist: captivating, unconventional, promising muscular policies to reclaim control of the economy from traditional elites on behalf of ordinary citizens.

These defining traits are also seen in his ally to the north, and by Nigel Farage, who styles himself as a pint-swilling people’s champion despite being a privately educated former stockbroker.

Until recent months, Milei’s approach – including widespread sell-offs and deep public spending cuts – had earned praise from the IMF for contributing to control inflation in check. The programme has something in common with that of his political hero the former UK prime minister, who similarly viewed inflation as a monster to be slain, no matter the cost.

But investors started to doubt in the government’s agenda lately following a shaky result in local polls and multiple graft allegations. Solely massive financial intervention from abroad has prevented what looked set to become a full-blown monetary collapse.

Inconsistencies

The 2016 referendum several years ago arguably had some of the same logic, and its figurehead, the former prime minister, swept away concerns regarding fiscal impacts with a bullish determination to implement the “will of the people” despite the establishment’s horror.

Farage has so far committed few policies in writing except for proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He aims to curb the central bank, perhaps even ditching its governor, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His fiscal plans seem in flux: concerned about facing criticism for planning a Liz Truss-style splurge, he recently abandoned a pledge to make significant tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on public spending cuts.

Labour hopes this stance will allow it to portray Farage as planning to reintroduce austerity – a point Rachel Reeves has emphasized often, contrasting it with her strategy of boosting public investment.

Jo Michell says there are contradictions within the populist platform, such as it is. “The party are bankrolled by affluent backers calling for tax cuts and deregulation, but also talking a lot about the grievances of working people and the decline in manufacturing employment,” he explains. “There is a conflict here between wealthy supporters seeking Thatcherism on steroids, and this story of restoring UK employment and industrial revival.”

Maintaining Control

Realistically, the evidence indicates neither left nor right populists often perform poorly when confronting practical difficulties (although each charismatic individual promises something unique).

Recent research from a leading journal examined the performance of dozens of populist leaders, from 1900 to 2020. It found that on average, over the long term, gross domestic product per head tends to be 10% lower in nations governed by populist rulers than in similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand with populist rule,” argue the paper’s authors.

A further interesting result of the research, however, is that even with their negative impacts, populist figures tend to be good at holding on to power, lasting on average eight years, compared with shorter tenures for their more moderate equivalents.

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

But returning to Buenos Aires, whether Milei’s populist project fails or is kept on life support by external aid, the Argentine people are already bearing a heavy price.