Do Populist-Led Governments Always Crash the Economy?

“Cambio, cambio.” Beneath the blazing sun, dozens of currency traders are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving ahead of the October 26 midterm elections in a nation accustomed to saving in the US dollar.

“The optimal moment for purchasing is now,” says one arbolito, declining to give her name. “[The dollar] went down slightly but it is a fake-out – it will rebound.”

Similar to her, economists across the spectrum anticipate a devaluation of the Argentine peso after the voting is over. The president has imposed a cap on the currency to control soaring price increases and currently it remains overvalued and reserves are exhausted, leaving Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina is a very special case. Argentina has been repeatedly racked by debt defaults and economic crises and its voters have been susceptible for decades to leftwing populism, such as the powerful Peronism, and now the president’s rightwing version.

The president epitomizes populist leadership: charismatic, iconoclastic, promising forceful policies to reclaim control of the economy from traditional elites on behalf of the people.

These defining traits are shared by his political partner in the United States, as well as 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.

Up until lately, Milei’s approach – involving widespread sell-offs and severe budget reductions – had earned praise from international lenders for helping to bring price rises under control. The programme shares similarities with the policies of Milei’s idol Margaret Thatcher, who also saw inflation as a monster to be slain, regardless of the consequences.

However financial markets began losing confidence in Milei’s radical project lately after a poor performance in provincial elections and multiple corruption scandals. Only large-scale economic support by the US has averted what looked set to become a major currency crisis.

Contradictions

The vote for Brexit in 2016 arguably had some of the same logic, and its figurehead, the former prime minister, swept away concerns about economic detail with confident resolve to implement public demand despite the establishment’s horror.

The Reform leader has so far outlined limited plans in writing except for a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He aims to rein in the central bank, possibly replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of the populist package.

His tax and spending policies seem unsettled: wary of being accused of planning reckless spending, he recently abandoned a pledge to make large tax cuts. His Reform party deputy, the party chairman, said they would focus instead on public spending cuts.

Labour aims this position will enable it to depict Farage as intending to bring back austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of increasing public investment.

An economics professor says there are contradictions within the populist platform, as it stands. “The party is funded by affluent backers demanding lower taxes and deregulation, yet also talking a lot about the complaints of working people and the loss of industrial jobs,” he explains. “There is a conflict there among rich backers who want Thatcherism on steroids, and this narrative of bringing back British jobs and reindustrialisation.”

Holding on to Power

In truth, research indicates populists of any stripe tend to fare well when confronting real-world challenges (though of course each charismatic individual claims to offer something unique).

A recent paper in the American Economic Review analysed the performance of dozens of populist leaders, over more than a century. The study revealed typically, after 15 years, gross domestic product per head tends to be a tenth less in nations run by populist rulers than in similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually go hand in hand with populist rule,” argue the researchers.

A further interesting result from the study, however, is despite their economic costs, populist figures are often effective at holding on to power, remaining in power for a considerable time, compared with shorter tenures for their more moderate equivalents.

Put simply, it is not clear whether even if their policies fail, populists face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond everyday financial matters.

Yet back in Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, Argentina’s citizens have already paid significant costs.