Do Populist-Led Governments Always Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, scores of currency traders are selling American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the October 26 congressional elections in a country long used to saving in the US dollar.

“The best time to buy is now,” states one arbolito, declining to give her name. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Similar to her, economic experts across the spectrum expect a depreciation of the Argentine peso after the voting concludes. President Javier Milei has imposed a cap on the peso to tame triple-digit inflation and now it remains overvalued and reserves are depleted, causing Argentina’s economy sluggish as buyers opt for low-cost foreign goods.

Ideal Conditions

The nation is a very special case. Argentina has been repeatedly hit by sovereign defaults and economic crises and its voters have been susceptible for decades to leftwing populism, such as the influential Peronism, and currently the president’s rightwing version.

Milei epitomizes populist leadership: captivating, unconventional, promising forceful measures to reclaim command of the economy from the establishment for the benefit of the people.

These key characteristics are shared by his political partner to the north, and by Nigel Farage, who presents 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 deep public spending cuts – had won plaudits from the IMF for contributing to bring price rises under control. This plan has something in common with that of Milei’s idol the former UK prime minister, who also saw rising prices as a dragon to be defeated, no matter the cost.

However investors started to doubt in the government’s agenda lately following a poor performance in provincial elections and a series of graft allegations. Only large-scale economic support from abroad has averted what seemed destined to be a major currency crisis.

Contradictions

The vote for Brexit several years ago arguably had similar reasoning, and its figurehead, Boris Johnson, dismissed doubts regarding fiscal impacts with confident resolve to enact the “will of the people” despite elite opposition.

The Reform leader to date outlined limited plans in writing except for proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He wants to rein in the central bank, possibly ditching its governor, the incumbent, with distrust toward traditional institutions being a key part of the populist package.

His tax and spending policies seem in flux: wary of facing criticism for proposing reckless spending, he lately abandoned a pledge to make large tax cuts. His Reform party deputy, Richard Tice, stated they would focus instead on public spending cuts.

The opposition aims this position will enable it to depict the populist as planning to bring back austerity – a point the chancellor has emphasized often, contrasting it with her strategy of increasing government spending.

An economics professor notes there are contradictions in Farage’s economic programme, such as it is. “The party are bankrolled by affluent backers calling for lower taxes and deregulation, but also emphasizing the grievances of working people and the decline in manufacturing employment,” he says. “There is a conflict there between wealthy supporters who want radical free-market policies, and this narrative of restoring British jobs and industrial revival.”

Holding on to Power

In truth, the evidence indicates populists of any stripe often perform poorly when confronting practical difficulties (although every populist leader promises distinct solutions).

Recent research in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, over the long term, GDP per capita tends to be 10% lower in nations run by populist rulers than in comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually go hand in hand under populist governments,” contend the researchers.

A further interesting result of the research, however, is that despite their economic costs, these leaders are often effective at holding on to power, lasting on average eight years, versus four for mainstream politicians.

Put simply, it remains uncertain that even when their policies fail, such leaders face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their appeal extends past everyday financial matters.

But returning to Buenos Aires, whether the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people are already bearing significant costs.