Do Populist Governments Inevitably Crash the Economic System?

“Exchange, exchange.” Beneath the blazing sun, scores of money changers are selling American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the October 26 congressional elections in a nation long used to holding the US dollar.

“The optimal moment to buy is currently,” says one arbolito, declining to give her name. “[The dollar] went down slightly but it’s deceptive – it will rebound.”

Similar to her, economic experts across the spectrum expect a depreciation of the national currency once the voting concludes. President Javier Milei has imposed a limit on the peso to tame triple-digit inflation and currently it remains overvalued and reserves are exhausted, causing the national economy sluggish as consumers turn to low-cost foreign goods.

Fertile Ground

The nation is a very special case. The country has been repeatedly racked by debt defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, such as the powerful Peronist movement, and now Milei’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, promising muscular measures to wrestle back command of economic management from traditional elites for the benefit of the people.

These key characteristics are also seen in his political partner in the United States, and by the UK politician, who styles himself as a pint-swilling champion of the common man even though he is a privately educated ex-finance professional.

Until recent months, Milei’s approach – involving extensive privatisations and severe budget reductions – had won plaudits from international lenders for helping to bring inflation under control. The programme has something in common with the policies of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a dragon to be slain, regardless of the consequences.

However investors began losing confidence in the government’s agenda lately after a poor performance in provincial elections and a series of graft allegations. Solely massive financial intervention by the US has averted what seemed destined to be a major monetary collapse.

Inconsistencies

The vote for Brexit in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, swept away concerns about economic detail with a bullish determination to enact the “will of the people” despite the establishment’s horror.

The Reform leader to date outlined limited plans in writing aside from a call for large-scale removals, that he later appeared to revise spontaneously. He wants to rein in the central bank, perhaps even ditching its governor, Andrew Bailey, with scepticism toward traditional institutions being a key part of populist rhetoric.

His fiscal plans appear to be unsettled: concerned about being accused of proposing reckless spending, he recently dropped a promise to make significant tax reductions. His second-in-command, Richard Tice, said they would concentrate instead on public spending cuts.

Labour aims this position will enable it to portray Farage as planning to bring back fiscal tightening – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting government spending.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “The party is funded by affluent backers calling for lower taxes and reduced rules, but also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension here between wealthy supporters seeking radical free-market policies, and this narrative of bringing back British jobs and industrial revival.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well when confronting practical difficulties (although each charismatic individual promises 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, after 15 years, gross domestic product per head tends to be 10% lower in nations governed by populist rulers than in similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically go hand in hand with populist rule,” contend the researchers.

Another intriguing finding of the research, though, is even with their negative impacts, these leaders tend to be good at retaining office, lasting on average eight years, compared with four for mainstream politicians.

Put simply, it is not clear that even when their policies fail, such leaders face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their appeal extends past everyday financial matters.

But returning to Buenos Aires, regardless of if the government’s agenda fails or is kept on life support by external aid, Argentina’s citizens have already paid a heavy price.