Can Populist Governments Inevitably Wreck the Economy?
“Cambio, cambio.” Under the blazing sun, scores of currency traders are selling American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the October 26 congressional elections in a nation accustomed to saving in the greenback.
“The optimal moment to buy is currently,” states one arbolito, declining to give her identity. “[The dollar] dropped a little but it is a fake-out – it will rebound.”
Similar to her, economic experts from all backgrounds expect a depreciation of the Argentine peso once the election is over. The president has imposed a cap on the currency to tame triple-digit inflation and currently it remains artificially high and foreign reserves are exhausted, leaving the national economy sluggish as consumers opt for low-cost foreign goods.
Ideal Conditions
Argentina is a very special case. The country has been repeatedly racked by debt defaults and economic crises and its voters have been receptive over the years to left-leaning populist movements, such as the influential Peronism, and currently Milei’s rightwing version.
The president epitomizes populist leadership: charismatic, iconoclastic, vowing muscular policies to reclaim control of the economy from traditional elites for the benefit of ordinary citizens.
These defining traits are shared by his political partner to the north, as well as Nigel Farage, who presents himself as a beer-drinking people’s champion despite being a privately educated former stockbroker.
Up until lately, Milei’s approach – including widespread sell-offs and deep budget reductions – had won plaudits from the IMF for helping to bring price rises under control. The programme has something in common with the policies of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be slain, regardless of the consequences.
However investors started to doubt in Milei’s radical project lately after a poor performance in local polls and multiple corruption scandals. Solely massive economic support by the US has prevented what seemed destined to be a major currency crisis.
Inconsistencies
The vote for Brexit in 2016 arguably had some of the same logic, and its leader, the former prime minister, dismissed concerns regarding fiscal impacts with confident resolve to enact the “will of the people” despite the establishment’s horror.
Farage has so far committed few policies in writing aside from a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to rein in the central bank, possibly ditching its governor, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.
His tax and spending policies seem unsettled: concerned about being accused of planning reckless spending, he recently abandoned a promise for large tax reductions. His second-in-command, the party chairman, stated they would focus instead on reductions in government expenditure.
Labour hopes this position will allow it to depict Farage as planning to bring back austerity – a point the chancellor has emphasized often, comparing it unfavorably to her strategy of increasing public investment.
An economics professor notes there are contradictions within the populist platform, such as it is. “Reform is funded by very wealthy people demanding tax cuts and reduced rules, yet also talking a lot about the grievances of working people and the loss of industrial jobs,” he explains. “There’s a tension there among wealthy supporters seeking Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”
Maintaining Control
Realistically, the evidence suggests populists of any stripe tend to fare well when faced with real-world challenges (although each charismatic individual promises something unique).
A recent paper in the American Economic Review analysed the outcomes of dozens of populist leaders, from 1900 to 2020. The study revealed typically, after 15 years, gross domestic product per head is often 10% lower in nations run by populist rulers than in similar economies under conventional leadership.
“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand with populist rule,” argue the researchers.
A further interesting result of the research, however, is even with their negative impacts, these leaders tend to be good at holding on to power, remaining in power for eight years, compared with shorter tenures 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 everyday financial matters.
Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support by external aid, Argentina’s citizens have already paid significant costs.
