Do Populist Governments Always Wreck the Economy?
“Cambio, cambio.” Beneath the blazing sun, dozens of currency traders are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the October 26 congressional elections in a country accustomed to saving in 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 will rebound.”
Similar to her, economists across the spectrum expect a devaluation of the national currency once the election concludes. President Javier Milei has placed a limit on the currency to tame triple-digit inflation and currently it remains artificially high and foreign reserves are depleted, causing the national economy sluggish as buyers opt for cheap imports.
Ideal Conditions
Argentina represents a unique situation. The country has frequently been hit by debt defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, in the form of the influential Peronism, and currently Milei’s rightwing version.
The president epitomizes populist leadership: captivating, unconventional, promising forceful measures to reclaim control of economic management from the establishment on behalf of ordinary citizens.
These defining traits are shared by his ally to the north, as well as Nigel Farage, who styles himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.
Up until lately, the president’s strategy – including extensive privatisations and deep budget reductions – had won plaudits from the IMF for helping to bring price rises in check. This plan has something in common with the policies of Milei’s idol Margaret Thatcher, who also saw rising prices as a monster to be slain, regardless of the consequences.
But investors began losing confidence in Milei’s radical project in recent months following a poor performance in provincial elections and multiple graft allegations. Only massive economic support by the US has averted what looked set to become a full-blown currency crisis.
Inconsistencies
The 2016 referendum several years ago likely contained some of the same logic, and its figurehead, the former prime minister, swept away doubts regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of elite opposition.
The Reform leader to date committed few policies in writing except for proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He wants to rein in the central bank, possibly ditching its governor, Andrew Bailey, with distrust of a stodgy establishment as a central element of the populist package.
His tax and spending policies appear to be unsettled: concerned about facing criticism for proposing reckless spending, he recently abandoned a pledge for significant tax reductions. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.
Labour aims this stance will allow it to portray the populist as planning to bring back austerity – a point the chancellor has emphasized often, contrasting it with her approach of increasing government spending.
An economics professor says there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by affluent backers demanding lower taxes and deregulation, yet also emphasizing the complaints of working people and the decline in manufacturing employment,” he says. “There is a conflict there between rich backers who want Thatcherism on steroids, and this narrative of bringing back British jobs and reindustrialisation.”
Maintaining Control
In truth, research suggests neither left nor right populists tend to fare well when faced with practical difficulties (though of course every populist leader promises something unique).
Recent research in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, over the long term, GDP per capita tends to be a tenth less in nations run by populist leaders compared to similar economies under conventional leadership.
“Economic disintegration, decreasing macroeconomic stability and the decay of governance usually go hand in hand with populist rule,” argue the paper’s authors.
A further interesting result of the research, though, is that even with their negative impacts, populist figures are often effective at holding on to power, remaining in power for eight years, versus four for mainstream politicians.
In other words, it is not clear whether even if their plans crash, such leaders face immediate consequences in elections. Similar to pledges made to regain sovereignty, their appeal reaches beyond everyday financial matters.
Yet returning to Buenos Aires, regardless of if Milei’s populist project fails or is kept on life support through foreign assistance, Argentina’s citizens are already bearing a heavy price.
