Can Populist-Led Governments Inevitably Crash the Economy?

“Dollars, dollars.” Under the blazing sun, scores of money changers are selling American currency along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the 26 October congressional elections in a country accustomed to holding the US dollar.

“The best time for purchasing is now,” says one arbolito, declining to give her identity. “[The dollar] went down a little but it is a fake-out – it’ll rise again.”

Similar to her, economists across the spectrum expect a devaluation of the Argentine peso after the election concludes. The president has placed a cap on the currency to tame triple-digit price increases and currently it remains overvalued and reserves are depleted, causing the national economy sluggish as buyers opt for low-cost foreign goods.

Fertile Ground

Argentina is a very special case. Argentina has frequently been hit by debt defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, in the form of the influential Peronism, and currently the president’s conservative populism.

Milei epitomizes populist leadership: captivating, iconoclastic, promising forceful measures to wrestle back command of economic management from the establishment for the benefit of the people.

These key characteristics are also seen in his ally in the United States, as well as the UK politician, who presents himself as a pint-swilling champion of the common man despite being a privately educated former stockbroker.

Up until lately, the president’s strategy – involving extensive privatisations and severe public spending cuts – had won plaudits from the IMF for helping to control inflation in check. The programme has something in common with that of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.

But financial markets began losing confidence in Milei’s radical project lately following a poor performance in provincial elections and a series of corruption scandals. Solely massive financial intervention by the US has prevented what seemed destined to be a major monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, Boris Johnson, swept away doubts about economic detail with confident resolve to implement the “will of the people” despite the establishment’s horror.

Farage has so far committed few policies to paper aside from a call for mass deportations, which he subsequently appeared to revise spontaneously. He wants to curb the Bank of England, perhaps even ditching its governor, the incumbent, with scepticism of a stodgy establishment being a key part of populist rhetoric.

His fiscal plans appear to be unsettled: concerned about being accused of planning a Liz Truss-style splurge, he recently abandoned a promise to make significant tax reductions. His Reform party deputy, the party chairman, stated they would concentrate instead on public spending cuts.

Labour aims this stance will allow it to portray the populist as intending to reintroduce fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with her approach of boosting government spending.

An economics professor says there are contradictions within the populist platform, as it stands. “Reform are bankrolled by affluent backers calling for lower taxes and reduced rules, but also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict there between rich backers seeking Thatcherism on steroids, and this story of restoring British jobs and industrial revival.”

Holding on to Power

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

A recent paper from a leading journal examined the outcomes of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, GDP per capita is often a tenth less in countries governed by populist rulers compared to similar economies with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually occur together under populist governments,” argue the researchers.

A further interesting result of the research, however, is that despite their economic costs, populist figures tend to be good at holding on to power, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.

In other words, it remains uncertain that even when their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their appeal extends past everyday financial matters.

But back in Buenos Aires, regardless of if Milei’s populist project fails or is sustained by external aid, Argentina’s citizens have already paid a heavy price.