Do Populist-Led Governments Inevitably Wreck the Economy?

“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are offering American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a country long used to holding the greenback.

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

Similar to her, economists from all backgrounds expect a depreciation of the Argentine peso after the election concludes. President Javier Milei has imposed a limit on the currency to tame triple-digit price increases and now it remains overvalued and reserves are depleted, leaving the national economy sluggish as buyers opt for low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. The country has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been susceptible over the years to left-leaning populist movements, in the form of the powerful Peronist movement, and now Milei’s rightwing version.

Milei epitomizes populist leadership: charismatic, iconoclastic, promising muscular measures to reclaim control of economic management from traditional elites for the benefit of ordinary citizens.

These key characteristics are also seen in his political partner in the United States, as well as the UK politician, who presents himself as a pint-swilling champion of the common man even though he is a public school-educated former stockbroker.

Until recent months, Milei’s approach – including extensive privatisations and deep budget reductions – had won plaudits from the IMF for helping to control inflation in check. This plan shares similarities with that of his political hero the former UK prime minister, who similarly viewed inflation as a dragon to be slain, no matter the cost.

However investors started to doubt in the government’s agenda in recent months after a poor performance in local polls and multiple corruption scandals. Only massive economic support by the US has prevented what looked set to become a major currency crisis.

Inconsistencies

The vote for Brexit in 2016 arguably had some of the same logic, and its leader, the former prime minister, dismissed concerns about economic detail with a bullish determination to enact public demand in the face of elite opposition.

The Reform leader has so far outlined limited plans to paper except for proposals for large-scale removals, which he subsequently seemed to adjust on the hoof. He aims to curb the central bank, perhaps even ditching its governor, Andrew Bailey, with distrust toward traditional institutions being a key part of the populist package.

His tax and spending policies appear to be unsettled: wary of facing criticism for planning a Liz Truss-style splurge, he lately dropped a promise to make large tax reductions. His Reform party deputy, Richard Tice, said they would concentrate instead on public spending cuts.

Labour aims this position will allow it to portray Farage as intending to bring back austerity – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of boosting public investment.

An economics professor notes there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by affluent backers demanding lower taxes and deregulation, but also emphasizing the grievances of ordinary workers and the decline of industrial jobs,” he explains. “There’s a tension there between wealthy supporters seeking radical free-market policies, and this story of restoring British jobs and industrial revival.”

Holding on to Power

In truth, research suggests neither left nor right populists often perform poorly when faced with real-world challenges (although each charismatic individual promises something unique).

Recent research in the American Economic Review examined the performance of 51 populist presidents and prime ministers, 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 similar economies with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually go hand in hand with populist rule,” argue the researchers.

Another intriguing finding from the study, though, is that even with their negative impacts, these leaders are often effective at holding on to power, remaining in power for a considerable time, compared with shorter tenures for their more moderate equivalents.

Put simply, it remains uncertain whether even if their plans crash, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond mundane economics.

But back in Buenos Aires, whether Milei’s populist project collapses or is kept on life support through foreign assistance, Argentina’s citizens are already bearing significant costs.