Can Populist-Led Governments Always Wreck the Economy?

“Dollars, dollars.” Under the blazing sun, dozens of currency traders are offering American currency on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the 26 October midterm elections in a country long used to holding the greenback.

“The best time to buy is currently,” says a arbolito, declining to give her name. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Like her, economists from all backgrounds anticipate a devaluation of the national currency after the voting is over. The president has placed a cap on the currency to control soaring inflation and currently it remains overvalued and reserves are exhausted, causing the national economy sluggish as consumers turn to low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has been repeatedly hit by sovereign defaults and economic crises and its voters have been receptive for decades to leftwing populism, such as the influential Peronism, and now Milei’s conservative populism.

Milei epitomizes populist leadership: charismatic, iconoclastic, promising forceful measures to wrestle back command of economic management from the establishment for the benefit of ordinary citizens.

These defining traits are shared by his political partner in the United States, and by the UK politician, who styles himself as a beer-drinking people’s champion even though he is a public school-educated former stockbroker.

Up until lately, Milei’s approach – including widespread sell-offs and deep public spending cuts – had won plaudits from international lenders for helping to control inflation in check. The programme shares similarities with that of his political hero Margaret Thatcher, who similarly viewed inflation as a dragon to be defeated, no matter the cost.

But investors began losing confidence in Milei’s radical project lately after a poor performance in provincial elections and a series of corruption scandals. Only massive economic support from abroad has prevented what seemed destined to be a major monetary collapse.

Contradictions

The vote for Brexit several years ago arguably had some of the same logic, and its figurehead, Boris Johnson, dismissed concerns about economic detail with a bullish determination to implement the “will of the people” despite elite opposition.

The Reform leader to date committed few policies to paper except for proposals for large-scale removals, that he later appeared to revise spontaneously. He aims to rein in the central bank, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of the populist package.

His fiscal plans appear to be unsettled: wary of being accused of proposing a Liz Truss-style splurge, he lately abandoned a pledge to make large tax cuts. His second-in-command, the party chairman, said they would concentrate instead on public spending cuts.

The opposition hopes this position will allow it to portray Farage as intending to reintroduce fiscal tightening – a point Rachel Reeves has made repeatedly, contrasting it with her approach of boosting government spending.

Jo Michell notes there are contradictions within the populist platform, as it stands. “The party is funded by very wealthy people calling for tax cuts and deregulation, yet also talking a lot about the complaints of ordinary workers and the decline in manufacturing employment,” he explains. “There is a conflict here between rich backers who want radical free-market policies, and this narrative of restoring UK employment and industrial revival.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well when faced with practical difficulties (although every populist leader promises something unique).

A recent paper in the American Economic Review analysed the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed that on average, after 15 years, gross domestic product per head is often 10% lower in countries governed by populist rulers compared to comparable countries with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually occur together under populist governments,” argue the paper’s authors.

Another intriguing finding from the study, however, is that despite their economic costs, populist figures are often effective at holding on to power, lasting on average a considerable time, compared with four for mainstream politicians.

Put simply, it remains uncertain whether even if their policies fail, such leaders face immediate consequences in elections. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.

But returning to Buenos Aires, whether the government’s agenda collapses or is kept on life support by external aid, the Argentine people have already paid a heavy price.