Can Populist Governments Inevitably Wreck the Economic System?

“Dollars, dollars.” Beneath the blazing sun, scores of money changers are hawking American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming ahead of the October 26 congressional elections in a nation long used to saving in the US dollar.

“The optimal moment to buy is currently,” states a arbolito, refusing to provide her identity. “[The dollar] went down a little but it is a fake-out – it will rebound.”

Similar to her, economists from all backgrounds anticipate a depreciation of the national currency once the election concludes. The president has imposed a limit on the currency to tame soaring price increases and currently it is artificially high and foreign reserves are depleted, causing the national economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina is a very special case. The country has been repeatedly racked by sovereign defaults and financial turmoil and the electorate have been susceptible over the years to leftwing populism, in the form of the influential Peronism, and currently the president’s conservative populism.

The president is a textbook populist: charismatic, iconoclastic, vowing forceful measures to reclaim control of economic management from the establishment on behalf of the people.

These key characteristics are also seen in his ally in the United States, and by the UK politician, who styles himself as a pint-swilling champion of the common man despite being a public school-educated ex-finance professional.

Until recent months, the president’s strategy – including extensive privatisations and deep budget reductions – had won plaudits from the IMF for helping to control price rises under control. The programme shares similarities with the policies of Milei’s idol Margaret Thatcher, who also saw rising prices as a monster to be defeated, regardless of the consequences.

However financial markets began losing confidence in Milei’s radical project lately after a poor performance in provincial elections and multiple graft allegations. Solely large-scale financial intervention from abroad has averted what looked set to become a full-blown currency crisis.

Contradictions

The vote for Brexit several years ago likely contained some of the same logic, and its leader, the former prime minister, dismissed concerns about economic detail with confident resolve to enact public demand despite elite opposition.

Farage has so far outlined limited plans to paper aside from proposals for large-scale removals, that he later seemed to adjust on the hoof. He wants to rein in the Bank of England, possibly replacing its head, Andrew Bailey, with distrust toward traditional institutions being a key part of the populist package.

His fiscal plans seem in flux: concerned about being accused of planning reckless spending, he lately dropped a pledge to make large tax reductions. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.

Labour hopes this stance will enable it to depict Farage as intending to bring back austerity – an argument Rachel Reeves has emphasized often, comparing it unfavorably to her approach of increasing public investment.

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, but also emphasizing the grievances of working people and the decline in manufacturing employment,” he explains. “There’s a tension there among rich backers seeking Thatcherism on steroids, and this story of restoring British jobs and industrial revival.”

Holding on to Power

In truth, the evidence indicates populists of any stripe tend to fare well when confronting practical difficulties (though of course each charismatic individual promises distinct solutions).

Recent research in the American Economic Review examined the performance of dozens of populist leaders, over more than a century. The study revealed typically, after 15 years, GDP per capita is often 10% lower in countries run by populist leaders than in similar economies with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” argue the paper’s authors.

Another intriguing finding from the study, though, is even with their negative impacts, these leaders tend to be good at holding on to power, lasting on average a considerable time, versus shorter tenures for their more moderate equivalents.

In other words, it remains uncertain whether even if their policies fail, populists immediately pay the price in elections. Similar to pledges made to “take back control”, their attraction extends past mundane economics.

But back in Buenos Aires, whether the government’s agenda fails or is kept on life support through foreign assistance, Argentina’s citizens have already paid significant costs.