Do Populist Governments Inevitably Wreck the Economy?

“Exchange, exchange.” Beneath the blazing sun, scores of money changers are offering American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the 26 October congressional elections in a country accustomed to holding the greenback.

“The optimal moment to buy is currently,” says one arbolito, refusing to provide her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Similar to her, economic experts across the spectrum expect a devaluation of the Argentine peso once the election concludes. President Javier Milei has imposed a cap on the peso to control soaring inflation and now it is overvalued and foreign reserves are exhausted, leaving the national economy stagnant as consumers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been racked by sovereign defaults and financial turmoil and the electorate have been receptive over the years to leftwing populism, in the form of the powerful Peronist movement, and now the president’s conservative populism.

Milei epitomizes populist leadership: charismatic, iconoclastic, vowing muscular policies to wrestle back control of economic management from the establishment for the benefit of the people.

These defining traits are shared by his ally in the United States, and by Nigel Farage, who presents himself as a pint-swilling people’s champion despite being a privately educated ex-finance professional.

Up until lately, the president’s strategy – involving extensive privatisations and deep public spending cuts – had earned praise from international lenders for helping to bring inflation in check. The programme has something in common with the policies of his political hero the former UK prime minister, who similarly viewed rising prices as a dragon to be defeated, regardless of the consequences.

But financial markets started to doubt in the government’s agenda in recent months following a poor performance in local polls and a series of graft allegations. Solely massive economic support from abroad has averted what looked set to become a major currency crisis.

Contradictions

The vote for Brexit several years ago arguably had some of the same logic, and its leader, Boris Johnson, swept away doubts regarding fiscal impacts with confident resolve to implement the “will of the people” despite elite opposition.

Farage to date committed few policies in writing aside from proposals for mass deportations, that he later seemed to adjust spontaneously. He wants to rein in the central bank, possibly ditching its governor, the incumbent, with scepticism toward traditional institutions as a central element of the populist package.

His fiscal plans seem in flux: concerned about being accused of proposing a Liz Truss-style splurge, he recently abandoned a promise to make large tax cuts. His second-in-command, Richard Tice, said they would focus instead on public spending cuts.

The opposition aims this stance will enable it to depict the populist as intending to bring back austerity – a point the chancellor has emphasized often, contrasting it with her approach of increasing government spending.

An economics professor says there are contradictions within the populist platform, such as it is. “The party are bankrolled by very wealthy people demanding tax cuts and deregulation, yet also talking a lot about the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension here among rich backers seeking Thatcherism on steroids, and this story of restoring British jobs and industrial revival.”

Holding on to Power

In truth, research indicates populists of any stripe tend to fare well when faced with real-world challenges (though of course each charismatic individual claims to offer something unique).

A recent paper in the American Economic Review examined the performance of dozens of populist leaders, over more than a century. The study revealed typically, after 15 years, GDP per capita is often 10% lower in nations run by populist leaders compared to comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand with populist rule,” contend the researchers.

Another intriguing finding of the research, however, is even with their negative impacts, these leaders are often effective at holding on to power, lasting on average eight years, versus four for their more moderate equivalents.

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

But returning to Buenos Aires, whether the government’s agenda fails or is kept on life support by external aid, the Argentine people have already paid significant costs.