Can Populist-Led Governments Inevitably Crash the Economic System?

“Exchange, exchange.” Beneath the scorching heat, scores of money changers are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the October 26 midterm elections in a country long used to holding the US dollar.

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

Similar to her, economic experts across the spectrum anticipate a depreciation of the Argentine peso after the voting concludes. President Javier Milei has imposed a cap on the currency to control soaring price increases and now it remains artificially high and reserves are exhausted, leaving the national economy sluggish as buyers opt for cheap imports.

Ideal Conditions

Argentina is a very special case. The country has frequently been hit by debt defaults and financial turmoil and its voters have been susceptible over the years to leftwing populism, in the form of the influential Peronist movement, and currently the president’s conservative populism.

The president epitomizes populist leadership: charismatic, iconoclastic, vowing forceful measures to reclaim control of the economy from the establishment on behalf of the people.

These defining traits are also seen in his ally in the United States, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man despite being a privately educated former stockbroker.

Up until lately, Milei’s approach – involving extensive privatisations and severe budget reductions – had earned praise from international lenders for contributing to control inflation in check. The programme shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed inflation as a dragon to be slain, no matter the cost.

However investors started to doubt in the government’s agenda lately after a shaky result in local polls and multiple graft allegations. Solely massive financial intervention from abroad has prevented what looked set to become a full-blown currency crisis.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its leader, Boris Johnson, dismissed doubts regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of elite opposition.

The Reform leader has so far committed few policies to paper except for a call for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to rein in the Bank of England, perhaps even replacing its head, the incumbent, with distrust of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans appear to be in flux: concerned about facing criticism for planning a Liz Truss-style splurge, he recently abandoned a pledge to make significant tax reductions. His Reform party deputy, the party chairman, said they would focus instead on reductions in government expenditure.

Labour hopes this position will enable it to depict Farage as planning to bring back austerity – a point the chancellor has made repeatedly, comparing it unfavorably to her strategy of increasing government spending.

An economics professor notes there exist inconsistencies in Farage’s economic programme, as it stands. “The party are bankrolled by affluent backers demanding tax cuts and reduced rules, but also talking a lot about the grievances of working people and the decline in manufacturing employment,” he explains. “There’s a tension there between wealthy supporters seeking Thatcherism on steroids, and this story of bringing back British jobs and reindustrialisation.”

Holding on to Power

In truth, research indicates neither left nor right populists tend to fare well when faced with practical difficulties (although every populist leader promises something unique).

Recent research in the American Economic Review examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, GDP per capita is often a tenth less in countries governed by populist rulers compared to comparable countries under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance usually occur together under populist governments,” argue the paper’s authors.

Another intriguing finding 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 four for mainstream politicians.

Put simply, it is not clear whether even if their plans crash, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

Yet returning to Buenos Aires, whether the government’s agenda collapses or is sustained through foreign assistance, Argentina’s citizens have already paid significant costs.