Do Populist-Led Governments Always Crash the Economy?

“Dollars, dollars.” Beneath the scorching heat, dozens of currency traders are selling US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming ahead of the 26 October congressional elections in a country long used to saving in the greenback.

“The best time for purchasing is currently,” states a arbolito, declining to give her identity. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Similar to her, economic experts from all backgrounds expect a depreciation of the national currency after the election is over. President Javier Milei has imposed a limit on the peso to control triple-digit inflation and now it is artificially high and reserves are exhausted, causing the national economy sluggish as buyers turn to cheap imports.

Fertile Ground

The nation represents a unique situation. Argentina has been repeatedly racked by sovereign defaults and financial turmoil and its voters have been susceptible over the years to leftwing populism, in the form of the influential Peronism, and currently the president’s rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, vowing forceful measures to reclaim command of economic management from traditional elites for the benefit of the people.

These key characteristics are shared by his political partner to the north, and by the UK politician, who presents himself as a beer-drinking people’s champion despite being a public school-educated former stockbroker.

Up until lately, Milei’s approach – involving extensive privatisations and deep budget reductions – had won plaudits from the IMF for helping to control inflation in check. The programme has something in common with the policies of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, no matter the cost.

However investors began losing confidence in the government’s agenda lately following a shaky result in provincial elections and a series of corruption scandals. Only massive economic support from abroad has averted what looked set to become a major monetary collapse.

Inconsistencies

The 2016 referendum several years ago arguably had similar reasoning, and its figurehead, the former prime minister, dismissed doubts regarding fiscal impacts with a bullish determination to implement public demand in the face of elite opposition.

Farage to date outlined limited plans in writing aside from proposals for mass deportations, that he later appeared to revise spontaneously. He aims to rein in the central bank, possibly replacing its head, Andrew Bailey, with scepticism of a stodgy establishment as a central element of the populist package.

His fiscal plans seem unsettled: wary of being accused of planning a Liz Truss-style splurge, he lately abandoned a promise for large tax reductions. His Reform party deputy, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

The opposition hopes this stance will allow it to portray Farage as intending to bring back austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her strategy of boosting government spending.

An economics professor says there are contradictions within the populist platform, as it stands. “Reform is funded by very wealthy people calling for tax cuts and deregulation, but also emphasizing the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension there between rich backers who want Thatcherism on steroids, and this story of bringing back British jobs and industrial revival.”

Maintaining Control

Realistically, the evidence suggests neither left nor right populists tend to fare well when confronting practical difficulties (though of course every populist leader promises distinct solutions).

Recent research in the American Economic Review examined the outcomes of dozens of populist leaders, over more than a century. The study revealed typically, after 15 years, GDP per capita tends to be 10% lower in countries governed by populist rulers compared to similar economies with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually occur together with populist rule,” argue the researchers.

A further interesting result of the research, though, is even with their negative impacts, these leaders are often effective at retaining office, remaining in power for eight years, compared with shorter tenures for their more moderate equivalents.

In other words, it remains uncertain that even when their policies fail, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their attraction extends past mundane economics.

But back in Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.