Do Populist Governments Always Wreck the Economic System?

“Cambio, cambio.” Beneath the blazing sun, dozens of money changers are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the 26 October midterm elections in a country accustomed to saving in the greenback.

“The optimal moment for purchasing is currently,” states a arbolito, declining to give her name. “[The dollar] went down slightly but it’s deceptive – it will rebound.”

Like her, economists from all backgrounds anticipate a devaluation of the Argentine peso after the voting is over. The president has imposed a cap on the peso to control soaring price increases and now it remains overvalued and reserves are depleted, causing Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina is a very special case. Argentina has been repeatedly racked by debt defaults and financial turmoil 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 epitomizes populist leadership: captivating, iconoclastic, vowing muscular measures to reclaim control of the economy from traditional elites for the benefit of the people.

These key characteristics are also seen in his political partner in the United States, and by the UK politician, who presents himself as a pint-swilling people’s champion despite being a privately educated ex-finance professional.

Until recent months, the president’s strategy – involving extensive privatisations and severe budget reductions – had won plaudits from international lenders for contributing to bring inflation in check. This plan has something in common with that of his political hero the former UK prime minister, who also saw inflation as a dragon to be defeated, no matter the cost.

However investors started to doubt in Milei’s radical project in recent months after a shaky result in local polls and multiple graft allegations. Solely large-scale financial intervention from abroad has prevented what looked set to become a full-blown currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained some of the same logic, and its figurehead, the former prime minister, dismissed concerns regarding fiscal impacts with a bullish determination to implement the “will of the people” despite the establishment’s horror.

The Reform leader to date outlined limited plans in writing except for a call for large-scale removals, which he subsequently appeared to revise spontaneously. He aims to rein in the central bank, perhaps even ditching its governor, the incumbent, with scepticism of a stodgy establishment being a key part of the populist package.

His fiscal plans seem unsettled: wary of being accused of proposing a Liz Truss-style splurge, he lately abandoned a promise to make large tax cuts. His second-in-command, Richard Tice, stated they would concentrate instead on public spending cuts.

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

Jo Michell notes there are contradictions within the populist platform, such as it is. “Reform are bankrolled by affluent backers demanding tax cuts and deregulation, but also talking a lot about the complaints of ordinary workers and the loss in manufacturing employment,” he explains. “There is a conflict here among wealthy supporters seeking radical free-market policies, and this narrative of bringing back British jobs and reindustrialisation.”

Holding on to Power

Realistically, research indicates neither left nor right populists tend to fare well when confronting practical difficulties (though of course each charismatic individual claims to offer something unique).

A recent paper from a leading journal analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, after 15 years, GDP per capita tends to be 10% lower in countries run by populist leaders compared to similar economies under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions typically occur together with populist rule,” contend the researchers.

A further interesting result from the study, however, is that even with their negative impacts, populist figures are often effective at retaining office, lasting on average a considerable time, compared with shorter tenures for mainstream politicians.

Put simply, it is not clear that even when their plans crash, populists face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their attraction extends past mundane economics.

But back in Buenos Aires, regardless of if the government’s agenda fails or is kept on life support through foreign assistance, the Argentine people are already bearing a heavy price.