Do Populist Governments Inevitably Wreck the Economy?

“Dollars, dollars.” Beneath 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 ahead of the 26 October congressional elections in a country accustomed to holding the US dollar.

“The best time for purchasing is now,” says a arbolito, declining to give her name. “[The dollar] dropped slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists from all backgrounds expect a depreciation of the Argentine peso after the election concludes. President Javier Milei has imposed a cap on the peso to control soaring inflation and currently it remains overvalued and foreign reserves are depleted, leaving the national economy stagnant as consumers turn to low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. The country has frequently been racked by sovereign defaults and economic crises and the electorate have been receptive for decades to left-leaning populist movements, such as the influential Peronism, and currently Milei’s rightwing version.

Milei is a textbook populist: captivating, unconventional, vowing forceful policies to reclaim command of economic management from the establishment for the benefit of the people.

These defining traits are shared by his ally in the United States, as well as Nigel Farage, who styles himself as a beer-drinking people’s champion even though he is a privately educated ex-finance professional.

Up until lately, the president’s strategy – involving widespread sell-offs and severe budget reductions – had won plaudits from the IMF for helping to bring inflation in check. This plan has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a dragon to be defeated, no matter the cost.

However financial markets started to doubt in Milei’s radical project lately after a poor performance in provincial elections and a series of graft allegations. Only massive financial intervention by the US has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The vote for Brexit in 2016 arguably had similar reasoning, and its figurehead, the former prime minister, dismissed concerns about economic detail with a bullish determination to implement public demand in the face of the establishment’s horror.

Farage to date outlined limited plans in writing except for proposals for mass deportations, that he later appeared to revise spontaneously. He wants to curb the central bank, perhaps even replacing its head, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies seem unsettled: concerned about being accused of planning reckless spending, he lately abandoned a promise to make large tax reductions. His second-in-command, the party chairman, said they would focus instead on reductions in government expenditure.

Labour aims this position will allow it to portray the populist as planning to reintroduce fiscal tightening – a point the chancellor has made repeatedly, contrasting it with her approach of increasing government spending.

Jo Michell says there are contradictions in Farage’s economic programme, as it stands. “The party are bankrolled by very wealthy people demanding tax cuts and deregulation, yet also talking a lot about the grievances of ordinary workers and the loss in manufacturing employment,” he says. “There is a conflict here between rich backers who want radical free-market policies, and this story of bringing back British jobs and reindustrialisation.”

Maintaining Control

In truth, the evidence suggests neither left nor right populists often perform poorly when confronting real-world challenges (though of course each charismatic individual claims to offer something unique).

Recent research from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, over the long term, GDP per capita is often a tenth less in nations run by populist leaders compared to similar economies with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” argue the researchers.

Another intriguing finding from the study, however, is that even with their negative impacts, populist figures tend to be good at retaining office, lasting on average eight years, versus four for their more moderate equivalents.

Put simply, it remains uncertain that even when their plans crash, such leaders immediately pay the price at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal extends past mundane economics.

Yet returning to Buenos Aires, regardless of if the government’s agenda fails or is kept on life support through foreign assistance, the Argentine people have already paid a heavy price.