Do Populist-Led Governments Inevitably Wreck the Economic System?

“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are hawking American currency along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the October 26 congressional elections in a nation long used to holding the US dollar.

“The best time for purchasing is now,” states one arbolito, declining to give her name. “[The dollar] went down slightly but it is a fake-out – it will rebound.”

Similar to her, economists across the spectrum anticipate a depreciation of the national currency after the election is over. President Javier Milei has placed a limit on the currency to tame triple-digit price increases and now it is artificially high and foreign reserves are depleted, causing Argentina’s economy stagnant as consumers turn to cheap imports.

Ideal Conditions

Argentina represents a unique situation. The country has been repeatedly racked by debt defaults and financial turmoil and the electorate have been receptive for decades to leftwing populism, such as the influential Peronism, and now the president’s conservative populism.

Milei epitomizes populist leadership: captivating, unconventional, vowing forceful measures to reclaim control of the economy from the establishment on behalf of the people.

These key characteristics are also seen in his political partner in the United States, as well as the UK politician, who styles himself as a beer-drinking champion of the common man even though he is a privately educated former stockbroker.

Up until lately, Milei’s approach – involving extensive privatisations and deep public spending cuts – had earned praise from international lenders for contributing to bring inflation under control. This plan has something in common with that of his political hero the former UK prime minister, who also saw inflation as a monster to be slain, no matter the cost.

But financial markets began losing confidence in the government’s agenda lately after a shaky result in provincial elections and multiple corruption scandals. Only large-scale financial intervention from abroad has averted what looked set to become a major currency crisis.

Contradictions

The 2016 referendum several years ago arguably had some of the same logic, and its figurehead, Boris Johnson, dismissed concerns regarding fiscal impacts with a bullish determination to enact the “will of the people” despite elite opposition.

The Reform leader to date committed few policies in writing aside from a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He aims to curb the Bank of England, possibly replacing its head, the incumbent, with distrust of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies seem unsettled: concerned about being accused of planning a Liz Truss-style splurge, he lately abandoned a pledge for large tax cuts. His Reform party deputy, Richard Tice, said they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will allow it to depict Farage as intending to bring back austerity – a point Rachel Reeves has made repeatedly, contrasting it with her approach of increasing public investment.

An economics professor notes there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by affluent backers calling for tax cuts and deregulation, yet also emphasizing the complaints of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict there between rich backers who want radical free-market policies, and this narrative of bringing back British jobs and reindustrialisation.”

Holding on to Power

In truth, the evidence indicates neither left nor right populists often perform poorly when confronting practical difficulties (although each charismatic individual promises distinct solutions).

A recent paper from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, after 15 years, GDP per capita tends to be a tenth less in countries governed by populist leaders compared to similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the decay of governance typically go hand in hand with populist rule,” argue the paper’s authors.

A further interesting result of the research, however, is despite their economic costs, these leaders are often effective at retaining office, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.

In other words, it is not clear that even when their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond mundane economics.

But back in Buenos Aires, whether Milei’s populist project fails or is kept on life support through foreign assistance, Argentina’s citizens have already paid significant costs.