Do Populist Governments Always Wreck the Economy?

“Cambio, cambio.” Under the blazing sun, dozens of money changers are offering American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a nation long used to saving in the greenback.

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

Similar to her, economic experts from all backgrounds expect a depreciation of the national currency once the election is over. President Javier Milei has imposed a cap on the currency to control triple-digit inflation and now it is overvalued and foreign reserves are exhausted, leaving the national economy sluggish as buyers turn to low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has been repeatedly racked by debt defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, in the form of the powerful Peronist movement, and currently Milei’s conservative populism.

Milei is a textbook populist: charismatic, unconventional, vowing forceful measures to wrestle back control of the economy from traditional elites for the benefit of ordinary citizens.

These defining traits are shared by his ally in the United States, and by the UK politician, who presents himself as a beer-drinking champion of the common man despite being a privately educated ex-finance professional.

Up until lately, Milei’s approach – including extensive privatisations and severe budget reductions – had won plaudits from international lenders for contributing to control price rises in check. The programme shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed rising prices as a dragon to be slain, no matter the cost.

However financial markets began losing confidence in Milei’s radical project lately following a shaky result in provincial elections and a series of corruption scandals. Only large-scale economic support from abroad has prevented what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum in 2016 likely contained similar reasoning, and its figurehead, Boris Johnson, swept away doubts about economic detail with a bullish determination to implement public demand in the face of elite opposition.

The Reform leader to date outlined limited plans in writing except for a call for mass deportations, which he subsequently appeared to revise on the hoof. He wants to rein in the Bank of England, perhaps even replacing its head, Andrew Bailey, with scepticism of a stodgy establishment being a key part of populist rhetoric.

His fiscal plans appear to be unsettled: concerned about being accused of planning reckless spending, he recently dropped a promise to make large tax reductions. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.

Labour hopes this position will enable it to depict Farage as intending to bring back austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her strategy of boosting public investment.

Jo Michell notes there are contradictions within the populist platform, such as it is. “Reform are bankrolled by very wealthy people calling for tax cuts and deregulation, but also emphasizing the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict there between wealthy supporters who want radical free-market policies, and this narrative of restoring UK employment and industrial revival.”

Holding on to Power

Realistically, research suggests populists of any stripe tend to fare well when faced with practical difficulties (although every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review analysed the outcomes of dozens of populist leaders, over more than a century. The study revealed that on average, after 15 years, GDP per capita tends to be a tenth less in countries run by populist leaders than in similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand with populist rule,” argue 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, versus shorter tenures for mainstream politicians.

In other words, it remains uncertain that even when their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

But back in Buenos Aires, whether the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people are already bearing significant costs.