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 shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the October 26 congressional elections in a nation long used to holding the US dollar.

“The best time to buy is currently,” states a arbolito, refusing to provide her name. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Like her, economic experts from all backgrounds expect a devaluation of the Argentine peso after the election concludes. The president has placed a cap on the currency to tame triple-digit inflation and now it is artificially high and reserves are depleted, causing Argentina’s economy sluggish as consumers opt for low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by debt defaults and financial turmoil and the electorate have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronist movement, and currently Milei’s rightwing version.

The president epitomizes populist leadership: charismatic, unconventional, vowing muscular policies to wrestle back control of economic management from traditional elites for the benefit of ordinary citizens.

These key characteristics are also seen in his ally in the United States, and by the UK politician, who presents himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, Milei’s approach – involving widespread sell-offs and deep public spending cuts – had won plaudits from international lenders for helping to control price rises in check. The programme has something in common with the policies of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be defeated, no matter the cost.

But financial markets started to doubt in Milei’s radical project lately following a shaky result in provincial elections and a series of corruption scandals. Only massive economic support by the US has averted what looked set to become a major currency crisis.

Inconsistencies

The 2016 referendum in 2016 arguably had some of the same logic, and its figurehead, Boris Johnson, dismissed concerns regarding fiscal impacts with a bullish determination to enact public demand despite elite opposition.

The Reform leader to date committed few policies in writing except for a call for mass deportations, that he later seemed to adjust on the hoof. He wants to rein in the central bank, perhaps even replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies seem unsettled: wary of facing criticism for planning a Liz Truss-style splurge, he recently dropped a promise to make significant tax reductions. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.

Labour hopes this position will enable 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.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “The party is funded by very wealthy people demanding lower taxes and reduced rules, but also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he says. “There’s a tension here among rich backers who want Thatcherism on steroids, and this story of restoring UK employment and industrial revival.”

Holding on to Power

Realistically, the evidence indicates neither left nor right populists tend to fare well when faced with real-world challenges (though of course each charismatic individual claims to offer something unique).

A recent paper from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, over the long term, gross domestic product per head tends to be a tenth less in countries governed by populist rulers compared to comparable countries under conventional leadership.

“Financial decline, weakening economic fundamentals and the decay of governance usually go hand in hand with populist rule,” contend the researchers.

Another intriguing finding of the research, however, is despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for a considerable time, compared with four for mainstream politicians.

Put simply, it remains uncertain whether even if their plans crash, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their appeal extends past mundane economics.

Yet returning to Buenos Aires, regardless of if the government’s agenda fails or is sustained by external aid, Argentina’s citizens are already bearing significant costs.