Do Populist Governments Inevitably Wreck the Economic System?

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

“The best time to buy is currently,” states one arbolito, declining to give her name. “[The dollar] went down a little but it is a fake-out – it will rebound.”

Like her, economic experts across the spectrum expect a depreciation of the national currency once the voting is over. The president has placed a limit on the currency to tame triple-digit inflation and now it is overvalued and foreign reserves are depleted, leaving the national economy stagnant as consumers opt for cheap imports.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by debt defaults and economic crises and its voters have been receptive over the years to leftwing populism, in the form of the powerful Peronism, and now Milei’s rightwing version.

The president is a textbook populist: charismatic, unconventional, promising muscular policies to reclaim command of economic management from traditional elites on behalf of ordinary citizens.

These defining traits are also seen in his political partner to the north, as well as the UK politician, who styles himself as a beer-drinking champion of the common man even though he is a privately educated former stockbroker.

Until recent months, the president’s strategy – including extensive privatisations and severe public spending cuts – had earned praise from the IMF for contributing to control price rises in check. This plan has something in common with that of Milei’s idol Margaret Thatcher, who also saw inflation as a dragon to be slain, no matter the cost.

But investors began losing confidence in Milei’s radical project in recent months after a shaky result in local polls and multiple corruption scandals. Solely large-scale economic support by the US has prevented what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum several years ago arguably had similar reasoning, and its leader, Boris Johnson, swept away concerns regarding fiscal impacts with confident resolve to implement public demand despite the establishment’s horror.

The Reform leader to date outlined limited plans in writing except for a call for mass deportations, which he subsequently seemed to adjust on the hoof. He aims to rein in the central bank, possibly ditching its governor, the incumbent, with scepticism of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans seem unsettled: wary of being accused of planning reckless spending, he lately dropped a pledge to make significant tax reductions. His second-in-command, Richard Tice, said they would concentrate instead on public spending cuts.

The opposition aims this stance will allow it to depict Farage as planning to reintroduce austerity – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of increasing government spending.

An economics professor notes there exist inconsistencies in Farage’s economic programme, such as it is. “Reform is funded by affluent backers demanding tax cuts and deregulation, but also emphasizing the complaints of working people and the decline of industrial jobs,” he says. “There is a conflict here among rich backers seeking radical free-market policies, and this narrative of restoring UK employment and reindustrialisation.”

Maintaining Control

Realistically, the evidence suggests neither left nor right populists tend to fare well when faced with real-world challenges (though of course every populist leader claims to offer something unique).

Recent research in the American Economic Review examined the performance of dozens of populist leaders, over more than a century. The study revealed that on average, after 15 years, GDP per capita is often a tenth less in countries run by populist rulers than in comparable countries under conventional leadership.

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

A further interesting result from the study, however, is that despite their economic costs, these leaders are often effective at retaining office, lasting on average a considerable time, compared with shorter tenures for mainstream politicians.

In other words, it remains uncertain that even when their policies fail, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to “take back control”, their appeal extends past mundane economics.

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