Do Populist Governments Inevitably Wreck the Economy?

“Cambio, cambio.” Beneath the blazing sun, scores of money changers are selling US dollars along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the October 26 midterm elections in a country accustomed to saving in the greenback.

“The optimal moment to buy is now,” says a arbolito, declining to give her identity. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”

Similar to her, economic experts across the spectrum expect a depreciation of the Argentine peso once the election is over. President Javier Milei has placed a limit on the currency to tame triple-digit inflation and currently it is artificially high and reserves are depleted, causing the national economy sluggish as buyers turn to low-cost foreign goods.

Ideal Conditions

The nation is a very special case. Argentina has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been receptive over the years to left-leaning populist movements, such as the powerful Peronism, and currently Milei’s rightwing version.

Milei epitomizes populist leadership: captivating, unconventional, vowing muscular measures to wrestle back control of the economy from traditional elites on behalf of the people.

These key characteristics are also seen in his ally in the United States, as well as the UK politician, who presents himself as a beer-drinking champion of the common man despite being a privately educated former stockbroker.

Up until lately, Milei’s approach – including widespread sell-offs and severe budget reductions – had won plaudits from international lenders for helping to bring inflation under control. This plan shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed rising prices as a dragon to be slain, no matter the cost.

However financial markets began losing confidence in the government’s agenda in recent months following a shaky result in local polls and multiple graft allegations. Only large-scale financial intervention from abroad has prevented what seemed destined to be a major currency crisis.

Inconsistencies

The vote for Brexit in 2016 likely contained some of the same logic, and its leader, the former prime minister, dismissed doubts about economic detail with a bullish determination to implement public demand in the face of elite opposition.

Farage to date outlined limited plans in writing aside from a call for mass deportations, which he subsequently appeared to revise spontaneously. He aims to rein in the central bank, possibly replacing its head, the incumbent, with distrust of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans seem in flux: concerned about facing criticism for planning a Liz Truss-style splurge, he recently dropped a promise for significant tax reductions. His Reform party deputy, Richard Tice, said they would concentrate instead on reductions in government expenditure.

Labour hopes this position will enable it to depict the populist as intending to bring back austerity – an argument Rachel Reeves has emphasized often, contrasting it with her strategy of boosting public investment.

Jo Michell notes there are contradictions within the populist platform, such as it is. “The party are bankrolled by very wealthy people demanding lower taxes and reduced rules, yet also talking a lot about the grievances of working people and the decline in manufacturing employment,” he explains. “There is a conflict here among rich backers who want Thatcherism on steroids, and this story of bringing back UK employment and reindustrialisation.”

Maintaining Control

In truth, the evidence suggests populists of any stripe tend to fare well when confronting practical difficulties (although every populist leader promises distinct solutions).

Recent research from a leading journal analysed the performance of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, 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.

“Financial decline, weakening economic fundamentals and the decay of governance typically occur together with populist rule,” argue the paper’s authors.

Another intriguing finding from the study, however, is that despite their economic costs, populist figures are often effective at retaining office, lasting on average a considerable time, versus shorter tenures for mainstream politicians.

Put simply, it is not clear that even when their plans crash, such leaders immediately pay the price at the ballot box. Similar to pledges made to “take back control”, their appeal extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if the government’s agenda fails or is sustained through foreign assistance, Argentina’s citizens have already paid significant costs.