Do Populist Governments Inevitably Wreck the Economic System?

“Dollars, dollars.” Under the scorching heat, dozens of currency traders are selling American currency along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 midterm elections in a country accustomed to saving in the US dollar.

“The optimal moment for purchasing is currently,” says a arbolito, declining to give her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists across the spectrum anticipate a devaluation of the national currency once the voting is over. The president has placed a cap on the peso to tame triple-digit inflation and currently it remains artificially high and reserves are depleted, causing the national economy sluggish as buyers opt for low-cost foreign goods.

Fertile Ground

Argentina is a very special case. The country has been repeatedly racked by sovereign defaults and economic crises and its voters have been susceptible over the years to left-leaning populist movements, in the form of the powerful Peronism, and now the president’s conservative populism.

The president epitomizes populist leadership: captivating, iconoclastic, promising muscular policies to wrestle back control of the economy from the establishment for the benefit of ordinary citizens.

These defining traits are shared by his ally to the north, as well as the UK politician, who styles himself as a beer-drinking people’s champion even though he is a privately educated ex-finance professional.

Up until lately, the president’s strategy – involving extensive privatisations and deep budget reductions – had won plaudits from the IMF for contributing to control inflation under control. The programme shares similarities with that of his political hero Margaret Thatcher, who also saw inflation as a monster to be slain, regardless of the consequences.

However investors started to doubt in Milei’s radical project lately following a poor performance in local polls and multiple corruption scandals. Solely large-scale financial intervention by the US has prevented what looked set to become a major currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained some of the same logic, and its leader, the former prime minister, dismissed doubts about economic detail with confident resolve to implement the “will of the people” in the face of elite opposition.

The Reform leader to date outlined limited plans to paper aside from a call for mass deportations, which he subsequently seemed to adjust spontaneously. He aims to curb the central bank, perhaps even ditching its governor, the incumbent, with scepticism toward traditional institutions as a central element of the populist package.

His tax and spending policies seem unsettled: wary of being accused of proposing a Liz Truss-style splurge, he recently dropped a promise for significant tax reductions. His second-in-command, Richard Tice, stated they would concentrate instead on public spending cuts.

Labour aims this stance will allow it to portray the populist as intending to reintroduce fiscal tightening – a point Rachel Reeves has made repeatedly, contrasting it with her strategy of boosting government spending.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by very wealthy people calling for lower taxes and reduced rules, yet also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he says. “There is a conflict there among rich backers seeking radical free-market policies, and this story of bringing back UK employment and industrial revival.”

Maintaining Control

Realistically, research suggests neither left nor right populists tend to fare well when confronting practical difficulties (though of course every populist leader promises distinct solutions).

Recent research from a leading journal examined the performance of dozens of populist leaders, over more than a century. It found that on average, over the long term, gross domestic product per head tends to be 10% lower in nations run by populist leaders than in comparable countries under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically occur together with populist rule,” argue the researchers.

A further interesting result of the research, though, is despite their economic costs, populist figures tend to be good at holding on to power, remaining in power for a considerable time, compared with four for their more moderate equivalents.

In other words, it is not clear that even when their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.

But back in Buenos Aires, whether the government’s agenda fails or is kept on life support through foreign assistance, Argentina’s citizens are already bearing a heavy price.