Do Populist-Led Governments Inevitably Crash the Economic System?

“Dollars, dollars.” Under the scorching heat, dozens of currency traders are offering American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the 26 October midterm elections in a nation long used to saving in the greenback.

“The best time to buy is now,” says a arbolito, refusing to provide her name. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Similar to her, economic experts across the spectrum anticipate a devaluation of the Argentine peso after the voting concludes. President Javier Milei has placed a cap on the currency to control soaring inflation and now it remains overvalued and foreign reserves are depleted, leaving Argentina’s economy sluggish as consumers opt for low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has been repeatedly hit by debt defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, such as the influential Peronism, and now the president’s rightwing version.

Milei is a textbook populist: captivating, iconoclastic, vowing forceful policies to wrestle back command of economic management from traditional elites for the benefit of ordinary citizens.

These key characteristics are shared by his ally to the north, as well as Nigel Farage, who styles himself as a beer-drinking people’s champion even though he is a public school-educated former stockbroker.

Up until lately, the president’s strategy – including widespread sell-offs and deep budget reductions – 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 similarly viewed inflation as a monster to be defeated, no matter the cost.

However investors began losing confidence in Milei’s radical project lately following a poor performance in provincial elections and a series of graft allegations. Only large-scale financial intervention by the US has prevented what seemed destined to be a full-blown monetary collapse.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its leader, the former prime minister, dismissed concerns regarding fiscal impacts with confident resolve to implement the “will of the people” in the face of elite opposition.

The Reform leader has so far committed few policies in writing aside from a call for large-scale removals, that he later seemed to adjust spontaneously. He aims to curb the Bank of England, possibly ditching its governor, the incumbent, with scepticism of a stodgy establishment being a key part of the populist package.

His fiscal plans seem unsettled: concerned about facing criticism for planning reckless spending, he lately abandoned a promise for significant tax cuts. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.

Labour hopes this position will enable it to depict Farage as planning to reintroduce austerity – an argument the chancellor has emphasized often, contrasting it with her strategy of increasing government spending.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “The party are bankrolled by affluent backers demanding tax cuts and reduced rules, yet also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he says. “There’s a tension here among rich backers who want Thatcherism on steroids, and this story of bringing back UK employment and industrial revival.”

Holding on to Power

Realistically, the evidence indicates neither left nor right populists tend to fare well when confronting real-world challenges (though of course each charismatic individual promises something unique).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found typically, over the long term, gross domestic product per head tends to be a tenth less in countries governed by populist rulers compared to similar economies under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically go hand in hand under populist governments,” contend the paper’s authors.

Another intriguing finding of the research, though, is that even with their negative impacts, populist figures tend to be good at holding on to power, remaining in power for a considerable time, versus four for their more moderate equivalents.

Put simply, it is not clear that even when their policies fail, such leaders face immediate consequences in elections. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

Yet returning to Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, Argentina’s citizens have already paid significant costs.