Can Populist-Led Governments Inevitably Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, scores of currency traders are offering American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), their business is booming ahead of the 26 October congressional elections in a country accustomed to saving in the greenback.

“The best time to buy is now,” states a arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it is a fake-out – it’ll rise again.”

Like her, economists across the spectrum expect a devaluation of the national currency once the election concludes. President Javier Milei has imposed a cap on the peso to control soaring inflation and now it is overvalued and reserves are depleted, leaving the national economy stagnant as consumers turn to low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been hit by sovereign defaults and economic crises and the electorate have been susceptible over the years to leftwing populism, such as the influential Peronist movement, and now the president’s conservative populism.

Milei is a textbook populist: charismatic, iconoclastic, vowing muscular policies to reclaim control of economic management from traditional elites on behalf of the people.

These defining traits are also seen in his political partner in the United States, as well as Nigel Farage, who styles himself as a pint-swilling people’s champion even though he is a public school-educated ex-finance professional.

Up until lately, Milei’s approach – involving widespread sell-offs and severe budget reductions – had won plaudits from international lenders for contributing to bring inflation in check. The programme has something in common with that of his political hero the former UK prime minister, who also saw rising prices as a dragon to be slain, regardless of the consequences.

But investors started to doubt in the government’s agenda in recent months after a poor performance in local polls and a series of graft allegations. Solely large-scale economic support from abroad has prevented what looked set to become a major currency crisis.

Contradictions

The vote for Brexit in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, dismissed doubts about economic detail with a bullish determination to implement public demand in the face of the establishment’s horror.

Farage has so far outlined limited plans to paper aside from proposals for large-scale removals, that he later appeared to revise spontaneously. He aims to rein in the Bank of England, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions as a central element of the populist package.

His fiscal plans appear to be unsettled: wary of being accused of proposing reckless spending, he recently abandoned a pledge for significant tax reductions. His Reform party deputy, Richard Tice, stated they would concentrate instead on public spending cuts.

The opposition hopes this position will allow it to portray Farage as intending to bring back fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting government spending.

An economics professor says there are contradictions within the populist platform, as it stands. “The party are bankrolled by affluent backers demanding tax cuts and reduced rules, but also emphasizing the grievances of working people and the decline of industrial jobs,” he says. “There is a conflict there between wealthy supporters seeking Thatcherism on steroids, and this narrative of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, the evidence indicates neither left nor right populists often perform poorly when faced with real-world challenges (though of course every populist leader claims to offer something unique).

A recent paper from a leading journal examined the outcomes of dozens of populist leaders, over more than a century. The study revealed that on average, after 15 years, gross domestic product per head is often 10% lower in countries governed by populist rulers compared to comparable countries under conventional leadership.

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

A further interesting result of the research, though, is despite their economic costs, populist figures tend to be good at retaining office, remaining in power for a considerable time, versus four for mainstream politicians.

Put simply, it is not clear that even when their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction extends past mundane economics.

But returning to Buenos Aires, whether the government’s agenda fails or is kept on life support by external aid, the Argentine people are already bearing significant costs.