Do Populist Governments Inevitably Crash the Economy?
“Cambio, cambio.” Beneath the blazing sun, dozens of currency traders are selling US dollars along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the 26 October congressional elections in a country accustomed to holding the US dollar.
“The best time to buy is now,” says a arbolito, refusing to provide her name. “[The dollar] dropped slightly but it is a fake-out – it’ll rise again.”
Similar to her, economic experts across the spectrum anticipate a devaluation of the national currency after the election is over. President Javier Milei has imposed a limit on the peso to control triple-digit price increases and now it is overvalued and reserves are exhausted, causing the national economy stagnant as buyers turn to low-cost foreign goods.
Ideal Conditions
Argentina represents a unique situation. Argentina has been repeatedly hit by debt defaults and financial turmoil and the electorate have been susceptible over the years to leftwing populism, such as the powerful Peronist movement, and now Milei’s rightwing version.
Milei epitomizes populist leadership: charismatic, unconventional, promising muscular policies to wrestle back control of economic management from the establishment on behalf of the people.
These defining traits are shared by his political partner to the north, as well as Nigel Farage, who presents himself as a beer-drinking champion of the common man even though he is a public school-educated ex-finance professional.
Until recent months, the president’s strategy – involving extensive privatisations and severe budget reductions – had earned praise from the IMF for helping to bring inflation in check. This plan shares similarities with the policies of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a monster to be slain, regardless of the consequences.
But financial markets began losing confidence in Milei’s radical project lately after a poor performance in provincial elections and a series of graft allegations. Solely massive economic support by the US has prevented what looked set to become a full-blown currency crisis.
Contradictions
The vote for Brexit in 2016 likely contained similar reasoning, and its figurehead, Boris Johnson, swept away concerns about economic detail with confident resolve to implement public demand despite the establishment’s horror.
Farage to date committed few policies to paper except for proposals for large-scale removals, that he later seemed to adjust on the hoof. He aims to rein in the central bank, perhaps even ditching its governor, the incumbent, with distrust of a stodgy establishment being a key part of the populist package.
His fiscal plans seem in flux: concerned about being accused of proposing reckless spending, he lately dropped a pledge to make large tax reductions. His Reform party deputy, Richard Tice, said they would focus instead on reductions in government expenditure.
The opposition hopes this stance will enable it to portray the populist as planning to reintroduce fiscal tightening – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of boosting government spending.
An economics professor notes there are contradictions within the populist platform, such as it is. “Reform are bankrolled by affluent backers demanding lower taxes and reduced rules, but also emphasizing the grievances of working people and the loss in manufacturing employment,” he explains. “There is a conflict here between wealthy supporters who want Thatcherism on steroids, and this narrative of bringing back UK employment and industrial revival.”
Holding on to Power
Realistically, research suggests neither left nor right populists tend to fare well when confronting practical difficulties (although every populist leader promises something unique).
Recent research from a leading journal analysed the outcomes of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, after 15 years, gross domestic product per head is often a tenth less in countries governed by populist leaders compared to similar economies with more mainstream regimes.
“Financial decline, decreasing macroeconomic stability and the decay of governance usually go hand in hand under populist governments,” contend the researchers.
A further interesting result of the research, however, is even with their negative impacts, populist figures are often effective at holding on to power, lasting on average a considerable time, versus shorter tenures for mainstream politicians.
In other words, it remains uncertain that even when their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond everyday financial matters.
Yet returning to Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, Argentina’s citizens are already bearing a heavy price.
