Can Populist Governments Inevitably Wreck the Economy?

“Dollars, dollars.” Under the scorching heat, scores of currency traders are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October congressional elections in a country long used to saving in the US dollar.

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

Like her, economic experts from all backgrounds expect a devaluation of the Argentine peso after the voting is over. President Javier Milei has imposed a limit on the currency to control triple-digit inflation and currently it is overvalued and foreign reserves are exhausted, leaving the national economy sluggish as consumers opt for low-cost foreign goods.

Ideal Conditions

The nation is a very special case. Argentina has been repeatedly racked by sovereign defaults and economic crises and its voters have been susceptible for decades to leftwing populism, such as the influential Peronist movement, and currently the president’s rightwing version.

The president epitomizes populist leadership: captivating, iconoclastic, vowing muscular policies to reclaim command of economic management from traditional elites for the benefit of the people.

These defining traits are shared by his ally in the United States, as well as Nigel Farage, who presents himself as a pint-swilling champion of the common man even though he is a public school-educated ex-finance professional.

Up until lately, the president’s strategy – involving extensive privatisations and severe budget reductions – had won plaudits from international lenders for contributing to bring inflation under control. The programme shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, no matter the cost.

However investors started to doubt in Milei’s radical project lately following a poor performance in local polls and multiple corruption scandals. Solely massive economic support by the US has averted what seemed destined to be a major currency crisis.

Inconsistencies

The vote for Brexit in 2016 likely contained similar reasoning, and its figurehead, Boris Johnson, swept away doubts regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of elite opposition.

The Reform leader has so far outlined limited plans in writing aside from proposals for large-scale removals, which he subsequently appeared to revise spontaneously. He wants to rein in the central bank, perhaps even replacing its head, the incumbent, with distrust toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies seem unsettled: concerned about being accused of proposing reckless spending, he recently abandoned a promise for significant tax reductions. His Reform party deputy, Richard Tice, said they would concentrate instead on public spending cuts.

Labour hopes this stance will enable it to depict the populist as intending to reintroduce austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her strategy of increasing public investment.

Jo Michell says there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by affluent backers calling for lower taxes and reduced rules, yet also emphasizing the grievances of working people and the loss in manufacturing employment,” he explains. “There’s a tension here between rich backers who want Thatcherism on steroids, and this narrative of restoring British jobs and reindustrialisation.”

Holding on to Power

Realistically, research suggests populists of any stripe tend to fare well when confronting practical difficulties (though of course each charismatic individual claims to offer something unique).

A recent paper from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found typically, over the long term, GDP per capita tends to be 10% lower in nations run by populist rulers than in similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically occur together under populist governments,” argue the researchers.

Another intriguing finding from the study, however, is even with their negative impacts, these leaders tend to be good at holding on to power, lasting on average eight years, versus four for their more moderate equivalents.

In other words, it is not clear that even when their policies fail, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their appeal reaches beyond mundane economics.

But back in Buenos Aires, regardless of if Milei’s populist project collapses or is sustained through foreign assistance, the Argentine people are already bearing significant costs.