Do Populist-Led Governments Inevitably Crash the Economy?

“Exchange, exchange.” Under the blazing sun, scores of currency traders are hawking US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the October 26 congressional elections in a country accustomed to saving in the US dollar.

“The best time to buy is now,” says a arbolito, refusing to provide 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 depreciation of the national currency once the election is over. The president has placed a cap on the currency to tame triple-digit inflation and now it is artificially high and foreign reserves are depleted, leaving Argentina’s economy stagnant as consumers turn to cheap imports.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been racked by sovereign defaults and economic crises and its voters have been receptive for decades to left-leaning populist movements, such as the influential Peronist movement, and now the president’s rightwing version.

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

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

Until recent months, the president’s strategy – including extensive privatisations and deep public spending cuts – had earned praise from the IMF for helping to control price rises in check. The programme has something in common with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a dragon to be slain, no matter the cost.

However financial markets started to doubt in the government’s agenda lately after a shaky result in provincial elections and multiple graft allegations. Only massive economic support by the US has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its figurehead, 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 to paper except for a call for large-scale removals, which he subsequently appeared to revise on the hoof. He wants to curb the central bank, possibly ditching its governor, the incumbent, with distrust of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies appear to be in flux: concerned about facing criticism for planning a Liz Truss-style splurge, he lately dropped a promise to make large tax reductions. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.

Labour aims this position will allow it to depict Farage as intending to bring back austerity – a point the chancellor has emphasized often, comparing it unfavorably to her approach of boosting public investment.

An economics professor says there are contradictions in Farage’s economic programme, as it stands. “Reform is funded by affluent backers demanding lower taxes and deregulation, but also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he says. “There’s a tension there between wealthy supporters who want radical free-market policies, and this story of restoring UK employment and reindustrialisation.”

Maintaining Control

In truth, research indicates populists of any stripe often perform poorly when confronting real-world challenges (though of course every populist leader promises something unique).

A recent paper from a leading journal analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, GDP per capita tends to be a tenth less in nations governed by populist rulers than in similar economies with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance typically occur together with populist rule,” argue the researchers.

Another intriguing finding of the research, though, is despite their economic costs, populist figures tend to be good at retaining office, 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, such leaders face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their appeal extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if Milei’s populist project fails or is sustained by external aid, the Argentine people have already paid significant costs.