Do Populist Governments Inevitably Crash the Economic System?

“Cambio, cambio.” Under the scorching heat, dozens of money changers are selling American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the 26 October congressional elections in a country long used to saving in the greenback.

“The optimal moment to buy is currently,” says one arbolito, refusing to provide her name. “[The dollar] dropped a little but it is a fake-out – it will rebound.”

Similar to her, economists across the spectrum anticipate a devaluation of the national currency once the voting is over. President Javier Milei has placed a limit on the currency to control triple-digit inflation and currently it is artificially high and foreign reserves are depleted, causing the national economy sluggish as consumers opt for low-cost foreign goods.

Fertile Ground

Argentina is a very special case. Argentina has been repeatedly racked by sovereign defaults and financial turmoil and its voters have been susceptible for decades to left-leaning populist movements, such as the powerful Peronism, and now the president’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, promising forceful policies to wrestle back control of the economy from traditional elites for the benefit of ordinary citizens.

These key characteristics are shared by his political partner to the north, as well as the UK politician, who styles himself as a beer-drinking champion of the common man even though he is a privately educated ex-finance professional.

Up until lately, Milei’s approach – including widespread sell-offs and deep budget reductions – had won plaudits from the IMF for contributing to bring inflation in check. The programme shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a dragon to be slain, no matter the cost.

But investors started to doubt in the government’s agenda lately following a shaky result in provincial elections and a series of corruption scandals. Only massive economic support by the US has averted what seemed destined to be a major monetary collapse.

Contradictions

The vote for Brexit several years ago arguably had similar reasoning, and its leader, Boris Johnson, swept away concerns regarding fiscal impacts with confident resolve to enact public demand despite the establishment’s horror.

The Reform leader to date committed few policies in writing aside from a call for mass deportations, that he later seemed to adjust spontaneously. He wants to rein in the central bank, possibly ditching its governor, Andrew Bailey, with scepticism toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies appear to be unsettled: wary of facing criticism for proposing reckless spending, he lately dropped a pledge for significant tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on public spending cuts.

Labour aims this stance will enable it to depict Farage as intending to reintroduce fiscal tightening – an argument Rachel Reeves has emphasized often, contrasting it with her strategy of boosting government spending.

An economics professor notes there exist inconsistencies within the populist platform, as it stands. “The party is funded by affluent backers demanding lower taxes and reduced rules, yet also emphasizing the complaints of working people and the loss in manufacturing employment,” he says. “There is a conflict here between rich backers who want radical free-market policies, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

In truth, the evidence indicates populists of any stripe often perform poorly when faced with real-world challenges (although each charismatic individual claims to offer something unique).

A recent paper in the American Economic Review examined the outcomes of dozens of populist leaders, over more than a century. The study revealed typically, over the long term, GDP per capita is often a tenth less in nations run by populist leaders compared to comparable countries under conventional leadership.

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

A further interesting result of the research, however, is that even with their negative impacts, these leaders tend to be good at holding on to power, lasting on average eight years, compared with shorter tenures for their more moderate equivalents.

Put simply, it is not clear that even when their plans crash, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their appeal reaches beyond everyday financial matters.

Yet back in Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, Argentina’s citizens have already paid a heavy price.