Do Populist-Led Governments Always Wreck the Economy?

“Dollars, dollars.” Under the blazing sun, scores of money changers are hawking American currency along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a nation long used to holding the US dollar.

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

Similar to her, economists across the spectrum anticipate a devaluation of the Argentine peso once the election is over. The president has imposed a cap on the peso to tame triple-digit price increases and now it remains overvalued and reserves are depleted, causing Argentina’s economy stagnant as buyers turn to low-cost foreign goods.

Ideal Conditions

The nation is a very special case. Argentina has been repeatedly hit by debt defaults and economic crises and the electorate have been receptive over the years to leftwing populism, in the form of the influential Peronist movement, and currently Milei’s conservative populism.

Milei epitomizes populist leadership: charismatic, unconventional, vowing forceful measures to wrestle back control of the economy from traditional elites on behalf of ordinary citizens.

These key characteristics are shared by his political partner in the United States, and by Nigel Farage, who styles himself as a pint-swilling champion of the common man despite being a privately educated ex-finance professional.

Until recent months, Milei’s approach – including extensive privatisations and deep public spending cuts – had won plaudits from international lenders for helping to control inflation under control. This plan shares similarities with the policies of Milei’s idol the former UK prime minister, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

However investors started to doubt in the government’s agenda lately after a shaky result in provincial elections and multiple graft allegations. Solely massive economic support by the US has prevented what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The vote for Brexit in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, dismissed doubts regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of elite opposition.

Farage has so far committed few policies in writing except for a call for mass deportations, that he later appeared to revise on the hoof. He wants to curb the Bank of England, perhaps even ditching its governor, the incumbent, with distrust of a stodgy establishment as a central element of the populist package.

His fiscal plans seem unsettled: concerned about being accused of planning reckless spending, he recently dropped a promise for significant tax reductions. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.

Labour hopes this position will enable it to depict Farage as intending to reintroduce fiscal tightening – an argument the chancellor has made repeatedly, comparing it unfavorably to her strategy of boosting public investment.

An economics professor notes there exist inconsistencies in Farage’s economic programme, such as it is. “The party are bankrolled by very wealthy people calling for lower taxes and deregulation, but also emphasizing the grievances of ordinary workers and the loss in manufacturing employment,” he explains. “There is a conflict there among wealthy supporters who want radical free-market policies, and this narrative of bringing back British jobs and industrial revival.”

Maintaining Control

In truth, research indicates neither left nor right populists often perform poorly when faced with practical difficulties (though of course each charismatic individual claims to offer distinct solutions).

A recent paper from a leading journal examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, over the long term, GDP per capita is often 10% lower in nations governed by populist rulers than in similar economies with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically occur together with populist rule,” contend the researchers.

Another intriguing finding from the study, however, is that despite their economic costs, populist figures are often effective at holding on to power, lasting on average eight years, 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 at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past everyday financial matters.

Yet returning to Buenos Aires, regardless of if Milei’s populist project fails or is kept on life support by external aid, the Argentine people are already bearing significant costs.