Do Populist Governments Inevitably Crash the Economy?

“Cambio, cambio.” Under the scorching heat, scores of currency traders are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a nation long used to saving in the US dollar.

“The optimal moment to buy is now,” says a arbolito, refusing to provide her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Similar to her, economists from all backgrounds expect a devaluation of the national currency after the election concludes. The president has placed a cap on the currency to tame triple-digit price increases and currently it remains overvalued and reserves are depleted, leaving the national economy sluggish as consumers turn to cheap imports.

Ideal Conditions

The nation is a very special case. Argentina has frequently been racked by sovereign defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, in the form of the powerful Peronism, and currently Milei’s conservative populism.

The president is a textbook populist: captivating, unconventional, promising forceful policies to reclaim control of the economy from the establishment on behalf of ordinary citizens.

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 privately educated former stockbroker.

Up until lately, Milei’s approach – involving widespread sell-offs and severe public spending cuts – had earned praise from the IMF for contributing to bring price rises under control. This plan shares similarities with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.

But financial markets started to doubt in Milei’s radical project lately after a shaky result in provincial elections and multiple graft allegations. Solely massive financial intervention from abroad has averted what seemed destined to be a major monetary collapse.

Contradictions

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, swept away doubts about economic detail with confident resolve to implement the “will of the people” in the face of elite opposition.

The Reform leader to date outlined limited plans to paper except for a call for large-scale removals, that he later seemed to adjust spontaneously. He aims to curb the Bank of England, possibly ditching its governor, the incumbent, with scepticism of a stodgy establishment being a key part of the populist package.

His fiscal plans appear to be unsettled: concerned about facing criticism for planning a Liz Truss-style splurge, he lately abandoned a promise for significant tax reductions. His second-in-command, the party chairman, stated they would focus instead on public spending cuts.

The opposition aims this stance will allow it to depict the populist as planning to bring back austerity – an argument the chancellor has emphasized often, contrasting it with her approach of boosting public investment.

Jo Michell says there exist inconsistencies within the populist platform, as it stands. “The party is funded by affluent backers demanding lower taxes and deregulation, but also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension there among rich backers seeking radical free-market policies, and this narrative of bringing back British jobs and reindustrialisation.”

Maintaining Control

Realistically, the evidence suggests populists of any stripe often perform poorly when faced with real-world challenges (though of course every populist leader promises distinct solutions).

A recent paper from a leading journal analysed the performance of dozens of populist leaders, from 1900 to 2020. It found typically, over the long term, gross domestic product per head tends to be a tenth less in countries governed by populist leaders than in comparable countries with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically occur together under populist governments,” contend the paper’s authors.

A further interesting result from the study, though, is that despite their economic costs, populist figures tend to be good at holding on to power, remaining in power for eight years, versus four for their more moderate equivalents.

Put simply, it is not clear whether even if their policies fail, populists immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

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