Do Populist Governments Inevitably Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, dozens of currency traders are offering American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the October 26 midterm elections in a nation long used to saving in the US dollar.

“The best time for purchasing is currently,” says one arbolito, refusing to provide her identity. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Similar to her, economic experts across the spectrum expect a devaluation of the Argentine peso once the voting concludes. President Javier Milei has imposed a limit on the currency to tame triple-digit inflation and now it is artificially high and foreign reserves are depleted, causing Argentina’s economy stagnant as consumers opt for cheap imports.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been racked by sovereign defaults and economic crises and its voters have been susceptible over the years to left-leaning populist movements, in the form of the powerful Peronist movement, and currently Milei’s rightwing version.

The president is a textbook populist: captivating, unconventional, vowing forceful measures to reclaim command of economic management from the establishment for the benefit of the people.

These defining traits are also seen in his ally in the United States, and by Nigel Farage, who presents himself as a beer-drinking champion of the common man despite being a public school-educated ex-finance professional.

Until recent months, the president’s strategy – involving widespread sell-offs and severe budget reductions – had earned praise from the IMF for helping to bring inflation in check. This plan has something in common with the policies of his political hero the former UK prime minister, who similarly viewed inflation as a monster to be slain, no matter the cost.

However investors began losing confidence in Milei’s radical project lately after a shaky result in provincial elections and a series of corruption scandals. Solely massive economic support from abroad has averted what looked set to become a full-blown monetary collapse.

Contradictions

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, dismissed concerns regarding fiscal impacts with confident resolve to implement public demand in the face of elite opposition.

The Reform leader to date outlined limited plans to paper aside from a call for mass deportations, that he later appeared to revise on the hoof. He aims to curb the central bank, perhaps even ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment being a key part of the populist package.

His tax and spending policies appear to be in flux: concerned about facing criticism for planning reckless spending, he recently dropped a pledge to make large tax reductions. His second-in-command, the party chairman, stated they would focus instead on public spending cuts.

The opposition aims this stance will allow it to depict Farage as intending to reintroduce austerity – a point the chancellor has emphasized often, comparing it unfavorably to her approach of increasing public investment.

Jo Michell says there are contradictions within the populist platform, such as it is. “Reform are bankrolled by affluent backers calling for lower taxes and deregulation, yet also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he says. “There’s a tension here among rich backers seeking radical free-market policies, and this story of bringing back UK employment and industrial revival.”

Maintaining Control

In truth, research suggests populists of any stripe often perform poorly when confronting practical difficulties (although every populist leader claims to offer something unique).

Recent research in the American Economic Review analysed the performance of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, over the long term, gross domestic product per head is often 10% lower in countries governed by populist rulers than in comparable countries with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically occur together under populist governments,” argue the researchers.

A further interesting result of the research, however, is that despite their economic costs, these leaders tend to be good at retaining office, lasting on average eight years, compared with shorter tenures for mainstream politicians.

Put simply, it is not clear that even when their plans crash, such leaders face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their appeal reaches beyond everyday financial matters.

But returning to 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.