Do Populist Governments Always Crash the Economic System?
“Cambio, cambio.” Beneath the blazing sun, scores of currency traders are selling US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the October 26 congressional elections in a nation long used to saving in the US dollar.
“The best time to buy is currently,” states one arbolito, declining to give her name. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”
Similar to her, economists across the spectrum expect a devaluation of the Argentine peso once the voting concludes. The president has imposed a cap on the peso to control soaring inflation and now it remains overvalued and foreign reserves are exhausted, leaving Argentina’s economy stagnant as buyers turn to cheap imports.
Ideal Conditions
Argentina is a very special case. The country has been repeatedly racked by debt defaults and economic crises and its voters have been receptive over the years to left-leaning populist movements, such as the influential Peronism, and currently Milei’s conservative populism.
The president is a textbook populist: charismatic, iconoclastic, vowing forceful measures to reclaim control of economic management from the establishment for the benefit of ordinary citizens.
These defining traits are shared by his ally to the north, as well as the UK politician, who presents himself as a beer-drinking champion of the common man even though he is a public school-educated ex-finance professional.
Up until lately, the president’s strategy – including widespread sell-offs and deep public spending cuts – had won plaudits from international lenders for helping to control price rises under control. This plan shares similarities with that of his political hero the former UK prime minister, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.
However investors started to doubt in Milei’s radical project in recent months after a shaky result in local polls and a series of corruption scandals. Solely large-scale financial intervention from abroad has prevented what looked set to become a major currency crisis.
Contradictions
The vote for Brexit several years ago likely contained some of the same logic, and its figurehead, the former prime minister, swept away doubts about economic detail with confident resolve to implement the “will of the people” in the face of elite opposition.
Farage has so far outlined limited plans to paper aside from proposals for mass deportations, that he later seemed to adjust spontaneously. He wants to rein in the central bank, possibly replacing its head, the incumbent, with scepticism of a stodgy establishment as a central element of populist rhetoric.
His tax and spending policies appear to be in flux: concerned about facing criticism for planning a Liz Truss-style splurge, he recently dropped a pledge to make large tax reductions. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.
Labour aims this stance will allow it to portray Farage as intending to bring back fiscal tightening – an argument Rachel Reeves has emphasized often, comparing it unfavorably to her strategy of increasing public investment.
An economics professor notes there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by very wealthy people demanding lower taxes and deregulation, yet also emphasizing the complaints of working people and the loss in manufacturing employment,” he says. “There’s a tension here among rich backers who want radical free-market policies, and this narrative of bringing back UK employment and industrial revival.”
Maintaining Control
In truth, the evidence indicates neither left nor right populists often perform poorly when confronting real-world challenges (although every populist leader promises something unique).
Recent research from a leading journal analysed the performance of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, after 15 years, GDP per capita tends to be a tenth less in nations governed by populist rulers than in similar economies under conventional leadership.
“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand under populist governments,” contend the paper’s authors.
A further interesting result from the study, though, is that despite their economic costs, populist figures tend to be good at retaining office, lasting on average a considerable time, compared with shorter tenures for mainstream politicians.
Put simply, it remains uncertain whether even if their plans crash, populists face immediate consequences in elections. Similar to pledges made to regain sovereignty, their appeal 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 have already paid a heavy price.
