Do Populist-Led Governments Always Crash the Economy?

“Exchange, exchange.” Under the scorching heat, scores of currency traders are offering American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming ahead of the 26 October midterm elections in a nation accustomed to holding the US dollar.

“The best time for purchasing is currently,” states one arbolito, refusing to provide her identity. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists from all backgrounds expect a depreciation of the Argentine peso after the voting is over. The president has placed a limit on the currency to control triple-digit inflation and currently it is artificially high and foreign reserves are depleted, leaving the national economy sluggish as buyers turn to cheap imports.

Fertile Ground

Argentina represents a unique situation. The country has been repeatedly racked by sovereign defaults and economic crises and the electorate have been susceptible over the years to leftwing populism, such as the influential Peronist movement, and now Milei’s rightwing version.

The president is a textbook populist: charismatic, iconoclastic, promising forceful measures to reclaim control of economic management from the establishment for the benefit of ordinary citizens.

These key characteristics are shared by his ally in the United States, and by the UK politician, who presents himself as a pint-swilling champion of the common man despite being a privately educated former stockbroker.

Until recent months, Milei’s approach – including widespread sell-offs and severe budget reductions – had won plaudits from international lenders for contributing to bring price rises under control. This plan has something in common with the policies of Milei’s idol Margaret Thatcher, who also saw inflation as a monster to be defeated, no matter the cost.

But investors began losing confidence in the government’s agenda in recent months following a poor performance in provincial elections and multiple corruption scandals. Solely massive financial intervention by the US has prevented what seemed destined to be a full-blown currency crisis.

Contradictions

The 2016 referendum in 2016 arguably had similar reasoning, and its leader, Boris Johnson, swept away concerns about economic detail with a bullish determination to enact public demand in the face of elite opposition.

Farage to date committed few policies to paper except for a call for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to curb the central bank, possibly replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of the populist package.

His fiscal plans appear to be unsettled: wary of being accused of proposing reckless spending, he recently dropped a pledge to make large tax reductions. His Reform party deputy, the party chairman, stated they would focus 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 emphasized often, contrasting it with her approach of increasing government spending.

Jo Michell says there are contradictions within the populist platform, as it stands. “Reform is funded by affluent backers calling for tax cuts and deregulation, but also emphasizing the grievances of ordinary workers and the decline of industrial jobs,” he says. “There’s a tension there among rich backers who want Thatcherism on steroids, and this story of bringing back British jobs and reindustrialisation.”

Holding on to Power

Realistically, the evidence indicates populists of any stripe often perform poorly when confronting practical difficulties (although each charismatic individual promises distinct solutions).

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 nations governed by populist rulers compared to comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually go hand in hand with populist rule,” contend the paper’s authors.

A further interesting result from the study, though, is that despite their economic costs, these leaders are often effective at retaining office, lasting on average eight years, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear that even when 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.

But returning to Buenos Aires, regardless of if Milei’s populist project fails or is sustained through foreign assistance, Argentina’s citizens are already bearing a heavy price.