Do Populist-Led Governments Inevitably Wreck the Economy?

“Dollars, dollars.” Under the scorching heat, scores of money changers are selling US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a country long used to saving in the greenback.

“The optimal moment to buy is currently,” states a arbolito, refusing to provide her name. “[The dollar] dropped a little but it’s deceptive – it will rebound.”

Like her, economic experts from all backgrounds anticipate a devaluation of the national currency once the election concludes. President Javier Milei has imposed a cap on the peso to control soaring price increases and now it is artificially high and foreign reserves are exhausted, leaving Argentina’s economy stagnant as buyers turn to cheap imports.

Fertile Ground

The nation represents a unique situation. The country has frequently been hit by debt defaults and financial turmoil and its voters have been susceptible for decades to leftwing populism, in the form of the powerful Peronist movement, and currently the president’s conservative populism.

The president is a textbook populist: captivating, iconoclastic, vowing forceful policies to reclaim command of economic management from the establishment on behalf of the people.

These key characteristics are also seen in his ally in the United States, and by Nigel Farage, who presents himself as a beer-drinking people’s champion despite being a public school-educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and deep public spending cuts – had earned praise from international lenders for contributing to control inflation in check. This plan has something in common with that of Milei’s idol the former UK prime minister, who also saw inflation as a dragon to be slain, regardless of the consequences.

However financial markets began losing confidence in Milei’s radical project in recent months after a shaky result in local polls and multiple graft allegations. Only massive financial intervention by the US has prevented what looked set to become a major monetary collapse.

Inconsistencies

The vote for Brexit several years ago likely contained similar reasoning, and its figurehead, Boris Johnson, dismissed concerns about economic detail with confident resolve to enact the “will of the people” despite the establishment’s horror.

Farage to date committed few policies in writing except for a call for mass deportations, which he subsequently appeared to revise spontaneously. He wants to rein in the Bank of England, possibly ditching its governor, the incumbent, with distrust of a stodgy establishment as a central element of the populist package.

His tax and spending policies seem in flux: concerned about facing criticism for proposing reckless spending, he recently dropped a promise for significant tax reductions. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.

Labour aims this position will allow it to depict Farage as intending to bring back austerity – an argument Rachel Reeves has emphasized often, comparing it unfavorably to her approach of boosting public investment.

An economics professor notes there exist inconsistencies within the populist platform, such as it is. “The party is funded by affluent backers calling for tax cuts and reduced rules, but also emphasizing the complaints of working people and the loss in manufacturing employment,” he says. “There’s a tension there between wealthy supporters seeking radical free-market policies, and this story of bringing back British jobs and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well 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 dozens of populist leaders, from 1900 to 2020. The study revealed typically, over the long term, gross domestic product per head tends to be a tenth less in nations run by populist rulers than in comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically go hand in hand with populist rule,” contend the paper’s authors.

Another intriguing finding of the research, however, is that even with their negative impacts, these leaders are often effective at holding on to power, lasting on average a considerable time, versus four for mainstream politicians.

Put simply, it is not clear that even when their plans crash, such leaders immediately pay the price in elections. Like the Brexiters’ promise to “take back control”, their attraction extends past everyday financial matters.

But back in Buenos Aires, whether Milei’s populist project fails or is sustained through foreign assistance, Argentina’s citizens are already bearing significant costs.

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Do Populist-Led Governments Inevitably Wreck the Economy?

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Inconsistencies

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