Do Populist Governments Inevitably Crash the Economic System?

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

“The optimal moment for purchasing is now,” states a arbolito, refusing to provide her name. “[The dollar] dropped a little but it’s deceptive – it will rebound.”

Similar to her, economic experts across the spectrum expect a devaluation of the national currency once the voting is over. President Javier Milei has placed a cap on the peso to control soaring price increases and currently it is artificially high and foreign reserves are exhausted, causing Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has been repeatedly racked by sovereign defaults and economic crises and the electorate have been susceptible for decades to leftwing populism, such as the powerful Peronist movement, and now Milei’s rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, vowing muscular measures to reclaim command of economic management from the establishment on behalf of the people.

These key characteristics are shared by his ally in the United States, and by Nigel Farage, who styles himself as a beer-drinking people’s champion despite being a public school-educated ex-finance professional.

Until recent months, the president’s strategy – including extensive privatisations and deep budget reductions – had won plaudits from international lenders for helping to bring price rises under control. This plan shares similarities with that of his political hero the former UK prime minister, who also saw rising prices as a dragon to be slain, no matter the cost.

However financial markets started to doubt in Milei’s radical project lately after a poor performance in provincial elections and multiple graft allegations. Solely large-scale economic support by the US has prevented what seemed destined to be a full-blown currency crisis.

Inconsistencies

The vote for Brexit in 2016 arguably had similar reasoning, and its figurehead, Boris Johnson, swept away concerns regarding fiscal impacts with a bullish determination to enact the “will of the people” in the face of the establishment’s horror.

The Reform leader has so far outlined limited plans in writing aside from proposals for mass deportations, that he later appeared to revise on the hoof. He wants to rein in the central bank, possibly ditching its governor, Andrew Bailey, with scepticism toward traditional institutions as a central element of populist rhetoric.

His fiscal plans seem in flux: concerned about facing criticism for planning reckless spending, he recently abandoned a promise for large tax reductions. His second-in-command, Richard Tice, said they would concentrate instead on reductions in government expenditure.

The opposition hopes this stance will allow it to depict the populist as intending to bring back austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her approach of increasing public investment.

Jo Michell says there exist inconsistencies in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people demanding tax cuts and deregulation, yet also emphasizing the complaints of ordinary workers and the decline in manufacturing employment,” he says. “There is a conflict here among wealthy supporters who want radical free-market policies, and this narrative of bringing back UK employment and reindustrialisation.”

Maintaining Control

In truth, research indicates neither left nor right populists often perform poorly when confronting real-world challenges (though of course every populist leader promises distinct solutions).

A recent paper from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found that on average, over the long term, GDP per capita is often 10% lower in nations run by populist rulers than in similar economies under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” argue the researchers.

Another intriguing finding of the research, however, is that despite their economic costs, populist figures are often effective at retaining office, lasting on average a considerable time, compared with four for mainstream politicians.

Put simply, it remains uncertain that even when their policies fail, such leaders face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their appeal reaches beyond mundane economics.

But back in Buenos Aires, whether the government’s agenda collapses or is kept on life support by external aid, the Argentine people have already paid significant costs.