Can Populist-Led Governments Always Wreck the Economy?

“Exchange, exchange.” Beneath the scorching heat, dozens of money changers are offering American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the October 26 congressional elections in a country accustomed to saving in the greenback.

“The optimal moment for purchasing is now,” says a arbolito, declining to give her identity. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Similar to her, economists from all backgrounds anticipate a depreciation of the Argentine peso after the election is over. President Javier Milei has placed a limit on the currency to tame soaring price increases and currently it remains artificially high and reserves are depleted, causing Argentina’s economy sluggish as consumers turn to cheap imports.

Fertile Ground

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

The president epitomizes populist leadership: captivating, unconventional, vowing muscular measures to wrestle back control of the economy from the establishment for the benefit of ordinary citizens.

These key characteristics are also seen in his ally to the north, and by the UK politician, who styles himself as a beer-drinking people’s champion even though he is a privately educated ex-finance professional.

Up until lately, the president’s strategy – including widespread sell-offs and deep public spending cuts – had won plaudits from the IMF for contributing to control price rises in check. The programme shares similarities with that of his political hero the former UK prime minister, who also saw inflation as a dragon to be slain, no matter the cost.

However investors started to doubt in Milei’s radical project lately following a poor performance in provincial elections and a series of corruption scandals. Solely large-scale financial intervention from abroad has prevented what looked set to become a major currency crisis.

Contradictions

The 2016 referendum several years ago likely contained similar reasoning, and its figurehead, the former prime minister, dismissed concerns about economic detail with a bullish determination to enact the “will of the people” in the face of elite opposition.

Farage to date committed few policies in writing except for proposals for mass deportations, which he subsequently appeared to revise spontaneously. 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 appear to be in flux: wary of facing criticism for proposing a Liz Truss-style splurge, he lately dropped a promise for large tax reductions. His second-in-command, the party chairman, said they would focus instead on public spending cuts.

The opposition hopes this position will allow it to depict Farage as planning to bring back austerity – a point the chancellor has emphasized often, contrasting it with her strategy 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 emphasizing the grievances of working people and the decline of industrial jobs,” he says. “There is a conflict there between wealthy supporters who want radical free-market policies, and this story of restoring UK employment and industrial revival.”

Maintaining Control

In truth, research suggests neither left nor right populists often perform poorly when faced with real-world challenges (although each charismatic individual claims to offer something unique).

A recent paper in the American Economic Review analysed the outcomes of dozens of populist leaders, over more than a century. The study revealed typically, after 15 years, GDP per capita is often a tenth less in nations governed by populist leaders compared to comparable countries with more mainstream regimes.

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

Another intriguing finding of the research, though, is despite their economic costs, populist figures tend to be good at holding on to power, remaining in power for eight years, versus four for their more moderate equivalents.

In other words, it is not clear that even when their policies fail, populists immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past mundane economics.

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