Do Populist Governments Inevitably Wreck the Economy?
“Dollars, dollars.” Beneath the blazing sun, scores of currency traders are offering American currency on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the October 26 midterm elections in a nation long used to saving in the greenback.
“The best time for purchasing is now,” says a arbolito, refusing to provide her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”
Like her, economists from all backgrounds anticipate a devaluation of the Argentine peso after the voting concludes. The president has imposed a cap on the peso to control triple-digit price increases and currently it is artificially high and reserves are exhausted, causing Argentina’s economy stagnant as consumers turn to cheap imports.
Fertile Ground
Argentina is a very special case. Argentina has been repeatedly racked by sovereign defaults and economic crises and the electorate have been receptive for decades to left-leaning populist movements, such as the influential Peronism, and now the president’s conservative populism.
The president epitomizes populist leadership: captivating, iconoclastic, vowing forceful policies to wrestle back command of the economy from the establishment on behalf of the people.
These defining traits are shared by his political partner in the United States, and by Nigel Farage, who styles himself as a pint-swilling champion of the common man even though he is a privately educated ex-finance professional.
Up until lately, the president’s strategy – involving widespread sell-offs and deep budget reductions – had won plaudits from the IMF for helping to bring price rises in check. The programme has something in common with that of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be slain, regardless of the consequences.
However investors started to doubt in Milei’s radical project in recent months after a shaky result in provincial elections and multiple graft allegations. Solely massive financial intervention from abroad has prevented what seemed destined to be a major currency crisis.
Contradictions
The 2016 referendum several years ago arguably had some of the same logic, and its leader, Boris Johnson, dismissed doubts about economic detail with confident resolve to enact public demand in the face of the establishment’s horror.
The Reform leader to date outlined limited plans to paper aside from proposals for mass deportations, that he later seemed to adjust on the hoof. He wants to curb the central bank, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of populist rhetoric.
His fiscal plans seem unsettled: concerned about being accused of planning reckless spending, he recently abandoned a pledge to make large tax cuts. His Reform party deputy, the party chairman, stated they would focus instead on public spending cuts.
Labour hopes this position will enable it to depict Farage as planning to reintroduce fiscal tightening – a point the chancellor has made repeatedly, comparing it unfavorably to her approach of boosting government spending.
Jo Michell says there are contradictions in Farage’s economic programme, as it stands. “Reform is funded by affluent backers demanding lower taxes and deregulation, yet also emphasizing the complaints of ordinary workers and the decline of industrial jobs,” he explains. “There’s a tension here between wealthy supporters who want radical free-market policies, and this story of bringing back British jobs and industrial revival.”
Holding on to Power
In truth, research indicates neither left nor right populists often perform poorly when faced with practical difficulties (although every populist leader claims to offer something unique).
Recent research in the American Economic Review analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, gross domestic product per head is often a tenth less in countries run by populist rulers compared to comparable countries with more mainstream regimes.
“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” argue the paper’s authors.
A further interesting result of the research, though, is despite their economic costs, these leaders are often effective at retaining office, remaining in power for a considerable time, versus four for mainstream politicians.
Put simply, it is not clear whether even if their policies fail, such leaders immediately pay the price at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction reaches beyond mundane economics.
But returning to Buenos Aires, whether Milei’s populist project collapses or is sustained by external aid, Argentina’s citizens are already bearing a heavy price.
