Can Populist Governments Inevitably Wreck the Economic System?

“Dollars, dollars.” Beneath the blazing sun, scores of currency traders are hawking US dollars on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the October 26 congressional elections in a country accustomed to holding the US dollar.

“The optimal moment to buy is now,” says one arbolito, declining to give her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Like her, economists across the spectrum anticipate a devaluation of the national currency once the election is over. President Javier Milei has imposed a cap on the peso to tame soaring price increases and now it remains artificially high and foreign reserves are depleted, leaving Argentina’s economy sluggish as consumers turn to low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has frequently been racked by debt defaults and financial turmoil and its voters have been receptive for decades to leftwing populism, in the form of the powerful Peronism, and currently Milei’s conservative populism.

Milei is a textbook populist: captivating, unconventional, promising forceful policies to reclaim command of the economy from traditional elites for the benefit of ordinary citizens.

These defining traits are also seen in his political partner in the United States, as well as the UK politician, who styles himself as a beer-drinking people’s champion despite being a privately educated ex-finance professional.

Up until lately, the president’s strategy – involving extensive privatisations and deep budget reductions – had earned praise from international lenders for contributing to bring price rises under control. The programme shares similarities with that of his political hero the former UK prime minister, who also saw inflation as a monster to be defeated, regardless of the consequences.

But investors started to doubt in the government’s agenda lately following a poor performance in provincial elections and multiple corruption scandals. Solely large-scale economic support from abroad has averted what seemed destined to be a full-blown currency crisis.

Inconsistencies

The 2016 referendum several years ago likely contained similar reasoning, and its figurehead, the former prime minister, dismissed doubts about economic detail with a bullish determination to enact public demand in the face of elite opposition.

Farage to date outlined limited plans to paper aside from a call for large-scale removals, which he subsequently appeared to revise spontaneously. He wants to curb the Bank of England, possibly ditching its governor, Andrew Bailey, with distrust of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies seem in flux: concerned about being accused of planning a Liz Truss-style splurge, he lately dropped a pledge for large tax reductions. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.

The opposition aims this position will enable it to depict the populist as intending to reintroduce austerity – a point the chancellor has made repeatedly, contrasting it with her approach of boosting government spending.

An economics professor says there are contradictions in Farage’s economic programme, as it stands. “The party are bankrolled by very wealthy people calling for lower taxes and reduced rules, yet also emphasizing the grievances of ordinary workers and the loss in manufacturing employment,” he explains. “There’s a tension here among rich backers who want Thatcherism on steroids, and this story of restoring UK employment and industrial revival.”

Maintaining Control

In truth, research indicates neither left nor right populists often perform poorly when faced with real-world challenges (although every populist leader promises something unique).

Recent research in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, after 15 years, GDP per capita is often a tenth less in nations run by populist leaders compared to comparable countries under conventional leadership.

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

Another intriguing finding of the research, though, is despite their economic costs, these leaders tend to be good at retaining office, lasting on average a considerable time, compared with four for their more moderate equivalents.

In other words, it is not clear whether even if their policies fail, such leaders face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their attraction extends past mundane economics.

But returning to Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, Argentina’s citizens have already paid significant costs.