Can Populist-Led Governments Inevitably Wreck the Economic System?

“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are hawking US dollars along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the October 26 congressional elections in a country long used to holding the greenback.

“The best time for purchasing is currently,” says a arbolito, declining to give her name. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”

Like her, economic experts from all backgrounds anticipate a depreciation of the Argentine peso once the election is over. President Javier Milei has imposed a cap on the peso to control soaring inflation and now it is overvalued and reserves are exhausted, causing Argentina’s economy sluggish as buyers opt for low-cost foreign goods.

Fertile Ground

Argentina is a very special case. The country has been repeatedly racked by sovereign defaults and economic crises and its voters have been receptive for decades to leftwing populism, such as the influential Peronist movement, and now the president’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, vowing forceful policies to wrestle back control of economic management from the establishment on behalf of the people.

These defining traits are shared by his ally to the north, as well as the UK politician, who styles himself as a pint-swilling champion of the common man despite being a public school-educated former stockbroker.

Up until lately, the president’s strategy – involving widespread sell-offs and severe public spending cuts – had earned praise from the IMF for contributing to control inflation in check. This plan shares similarities with that of his political hero Margaret Thatcher, who also saw inflation as a dragon to be defeated, regardless of the consequences.

But financial markets began losing confidence in the government’s agenda lately after a shaky result in local polls and a series of graft allegations. Only large-scale economic support by the US has prevented what seemed destined to be a major currency crisis.

Contradictions

The vote for Brexit in 2016 likely contained similar reasoning, and its leader, the former prime minister, dismissed concerns regarding fiscal impacts with confident resolve to enact public demand despite the establishment’s horror.

The Reform leader has so far outlined limited plans in writing aside from a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He wants to rein in the central bank, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies seem unsettled: concerned about being accused of proposing reckless spending, he lately abandoned a pledge to make significant tax cuts. His second-in-command, Richard Tice, said they would concentrate instead on reductions in government expenditure.

The opposition hopes this stance will enable it to portray Farage as planning to bring back austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her approach 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 very wealthy people demanding lower taxes and deregulation, but also talking a lot about the grievances of ordinary workers and the decline in manufacturing employment,” he says. “There is a conflict here between rich backers seeking Thatcherism on steroids, and this story of restoring British jobs and reindustrialisation.”

Maintaining Control

Realistically, research suggests populists of any stripe often perform poorly when confronting real-world challenges (though of course every populist leader claims to offer 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, over the long term, GDP per capita is often 10% lower in nations run by populist rulers than in comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually go hand in hand with populist rule,” argue the paper’s authors.

A further interesting result of the research, though, is that even with their negative impacts, these leaders are often effective at holding on to power, remaining in power for eight years, versus four for mainstream politicians.

In other words, it remains uncertain whether even if their policies fail, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction reaches beyond mundane economics.

Yet returning to Buenos Aires, regardless of if Milei’s populist project fails or is sustained by external aid, Argentina’s citizens are already bearing significant costs.