Do Populist-Led Governments Inevitably Wreck the Economic System?

“Exchange, exchange.” Beneath the blazing sun, scores of currency traders are offering American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the October 26 congressional elections in a nation accustomed to saving in the US dollar.

“The best time for purchasing is now,” states a arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economists across the spectrum expect a depreciation of the Argentine peso after the voting is over. President Javier Milei has placed a limit on the peso to control soaring price increases and currently it is artificially high and foreign reserves are depleted, leaving Argentina’s economy sluggish as buyers opt for cheap imports.

Fertile Ground

The nation is a very special case. Argentina has frequently been racked by sovereign defaults and financial turmoil and its voters have been susceptible for decades to leftwing populism, such as the powerful Peronist movement, and currently Milei’s rightwing version.

Milei is a textbook populist: captivating, iconoclastic, promising forceful measures to wrestle back control of the economy from the establishment for the benefit of ordinary citizens.

These key characteristics are also seen in his ally to the north, and by the UK politician, who presents himself as a pint-swilling champion of the common man even though he is a privately educated former stockbroker.

Up until lately, Milei’s approach – including widespread sell-offs and severe budget reductions – had earned praise from international lenders for helping to control price rises in check. The programme has something in common with that of his political hero Margaret Thatcher, who also saw inflation as a dragon to be slain, regardless of the consequences.

But financial markets began losing confidence in the government’s agenda lately after a poor performance in local polls and a series of corruption scandals. Solely massive financial intervention from abroad has prevented what looked set to become a full-blown monetary collapse.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its leader, Boris Johnson, swept away concerns regarding fiscal impacts with a bullish determination to enact public demand in the face of elite opposition.

Farage to date outlined limited plans in writing aside from proposals for mass deportations, that he later appeared to revise on the hoof. He aims to rein in the Bank of England, possibly ditching its governor, the incumbent, with distrust toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies appear to be in flux: wary of being accused of proposing reckless spending, he recently dropped a pledge to make significant tax reductions. His second-in-command, Richard Tice, stated they would concentrate instead on public spending cuts.

Labour hopes this stance will enable it to portray Farage as planning to reintroduce fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with her approach of increasing public investment.

An economics professor says there are contradictions in Farage’s economic programme, as it stands. “Reform is funded by affluent backers calling for lower taxes and deregulation, but also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he says. “There’s a tension there among wealthy supporters seeking radical free-market policies, and this story of restoring UK employment and reindustrialisation.”

Maintaining Control

Realistically, the evidence suggests populists of any stripe tend to fare well when faced with real-world challenges (although each charismatic individual promises something unique).

Recent research in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, over the long term, gross domestic product per head tends to be a tenth less in nations governed by populist leaders compared to comparable countries with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand with populist rule,” argue the researchers.

Another intriguing finding from the study, however, is despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for a considerable time, versus shorter tenures for mainstream politicians.

In other words, it remains uncertain that even when their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past everyday financial matters.

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