Can Populist Governments Always Wreck the Economy?

“Dollars, dollars.” Under the scorching heat, dozens of currency traders are hawking American currency along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the 26 October midterm elections in a nation long used to saving in the greenback.

“The optimal moment for purchasing is now,” states a arbolito, declining to give her identity. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Like her, economists across the spectrum anticipate a devaluation of the national currency once the voting concludes. President Javier Milei has imposed a cap on the peso to control soaring inflation and currently it is overvalued and foreign reserves are exhausted, causing the national economy stagnant as buyers opt for cheap imports.

Ideal Conditions

Argentina is a very special case. The country has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been susceptible over the years to leftwing populism, such as the powerful Peronism, and now the president’s rightwing version.

Milei epitomizes populist leadership: captivating, iconoclastic, promising muscular policies to reclaim command of economic management from the establishment on behalf of the people.

These key characteristics are shared by his political partner to the north, and by the UK politician, who presents himself as a beer-drinking champion of the common man despite being a public school-educated ex-finance professional.

Up until lately, the president’s strategy – involving extensive privatisations and severe budget reductions – had won plaudits from international lenders for contributing to control price rises under control. The programme has something in common with that of his political hero the former UK prime minister, who similarly viewed rising prices as a dragon to be slain, regardless of the consequences.

But financial markets began losing confidence in the government’s agenda in recent months after a poor performance in local polls and a series of corruption scandals. Solely large-scale economic support by the US has averted what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum several years ago likely contained similar reasoning, and its figurehead, Boris Johnson, swept away concerns about economic detail with confident resolve to enact the “will of the people” in the face of elite opposition.

Farage to date outlined limited plans in writing except for a call for mass deportations, which he subsequently appeared to revise on the hoof. He aims to curb the Bank of England, perhaps even ditching its governor, the incumbent, with distrust toward traditional institutions as a central element of the populist package.

His tax and spending policies seem in flux: concerned about facing criticism for planning reckless spending, he lately dropped a promise for significant tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on public spending cuts.

The opposition aims this stance will allow it to depict the populist as planning to bring back fiscal tightening – a point the chancellor has emphasized often, comparing it unfavorably to her strategy of boosting public investment.

Jo Michell says there exist inconsistencies in Farage’s economic programme, as it stands. “The party are bankrolled by affluent backers calling for lower taxes and deregulation, but also emphasizing the grievances of working people and the decline of industrial jobs,” he says. “There is a conflict here among wealthy supporters seeking Thatcherism on steroids, and this narrative of restoring UK employment and reindustrialisation.”

Maintaining Control

Realistically, the evidence suggests populists of any stripe often perform poorly when confronting real-world challenges (though of course every populist leader promises something unique).

A recent paper in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, over the long term, gross domestic product per head tends to be 10% lower in countries run by populist leaders compared to comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” argue the paper’s authors.

A further interesting result from the study, though, is even with their negative impacts, these leaders are often effective at retaining office, lasting on average eight years, versus four for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, populists face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

But returning to Buenos Aires, whether the government’s agenda collapses or is sustained through foreign assistance, the Argentine people are already bearing a heavy price.