Do Populist-Led Governments Inevitably Crash the Economy?

“Exchange, exchange.” Beneath the scorching heat, dozens of currency traders are offering US dollars on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the 26 October midterm elections in a nation long used to holding the greenback.

“The optimal moment to buy is currently,” states a arbolito, refusing to provide her name. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Similar to her, economic experts across the spectrum expect a devaluation of the Argentine peso after the voting is over. The president has placed a limit on the peso to control triple-digit price increases and now it is artificially high and reserves are depleted, causing the national economy sluggish as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. The country has frequently been hit by sovereign defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, such as the influential Peronism, and currently the president’s conservative populism.

The president is a textbook populist: captivating, unconventional, promising muscular policies to reclaim control of the economy from the establishment for the benefit of ordinary citizens.

These key characteristics are shared by his ally in the United States, as well as Nigel Farage, who presents himself as a beer-drinking people’s champion despite being a privately educated former stockbroker.

Up until lately, Milei’s approach – including widespread sell-offs and deep public spending cuts – had earned praise from the IMF for helping to bring inflation in check. The programme shares similarities with the policies of his political hero the former UK prime minister, who also saw inflation as a dragon to be defeated, no matter the cost.

But investors started to doubt in Milei’s radical project lately following a poor performance in local polls and multiple graft allegations. Solely massive economic support by the US has averted what seemed destined to be a major monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, Boris Johnson, swept away concerns about economic detail with a bullish determination to enact the “will of the people” in the face of elite opposition.

Farage to date outlined limited plans to paper aside from proposals for large-scale removals, which he subsequently seemed to adjust spontaneously. He aims to curb the Bank of England, perhaps even ditching its governor, Andrew Bailey, with scepticism toward traditional institutions as a central element of populist rhetoric.

His fiscal plans seem unsettled: wary of facing criticism for planning a Liz Truss-style splurge, he lately abandoned a pledge to make large tax reductions. His second-in-command, the party chairman, said they would concentrate instead on public spending cuts.

The opposition hopes this position will enable it to depict the populist as planning to bring back austerity – a point the chancellor has emphasized often, comparing it unfavorably to her strategy of increasing public investment.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “The party are bankrolled by very wealthy people demanding lower taxes and reduced rules, but also talking a lot about the complaints of working people and the loss in manufacturing employment,” he explains. “There’s a tension here among rich backers who want Thatcherism on steroids, and this story of bringing back UK employment and reindustrialisation.”

Maintaining Control

In truth, research suggests neither left nor right populists tend to fare well when confronting real-world challenges (though of course every populist leader claims to offer something unique).

A recent paper in the American Economic Review examined the outcomes of dozens of populist leaders, from 1900 to 2020. The study revealed typically, after 15 years, gross domestic product per head is often a tenth less in nations governed by populist leaders compared to comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance typically go hand in hand under populist governments,” argue the researchers.

A further interesting result from the study, though, is that despite their economic costs, these leaders tend to be good at holding on to power, lasting on average eight years, compared with shorter tenures for their more moderate equivalents.

Put simply, it is not clear whether even if their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction extends past everyday financial matters.

But back in Buenos Aires, regardless of if the government’s agenda collapses or is sustained through foreign assistance, the Argentine people are already bearing a heavy price.