Do Populist-Led Governments Always Wreck the Economic System?

“Cambio, cambio.” Beneath the blazing sun, dozens of currency traders are hawking American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a nation long used to saving in the greenback.

“The best time for purchasing is currently,” states a arbolito, refusing to provide her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economic experts from all backgrounds anticipate a devaluation of the Argentine peso after the election concludes. President Javier Milei has imposed a cap on the peso to control soaring inflation and now it remains overvalued and reserves are exhausted, leaving Argentina’s economy sluggish as consumers opt for cheap imports.

Fertile Ground

Argentina represents a unique situation. The country has been repeatedly racked by sovereign defaults and economic crises and the electorate have been receptive for decades to leftwing populism, such as the powerful Peronist movement, and now Milei’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, vowing forceful policies to wrestle back command of the economy from the establishment for the benefit of the people.

These defining traits are shared by his political partner in the United States, as well as Nigel Farage, who presents himself as a pint-swilling people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, Milei’s approach – involving extensive privatisations and severe budget reductions – had won plaudits from international lenders for helping to control inflation in check. The programme shares similarities with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be defeated, no matter the cost.

But financial markets started to doubt in the government’s agenda in recent months following a poor performance in local polls and multiple graft allegations. Solely massive economic support from abroad has averted what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum in 2016 arguably had some of the same logic, and its leader, Boris Johnson, dismissed doubts regarding fiscal impacts with a bullish determination to implement the “will of the people” in the face of elite opposition.

Farage to date committed few policies to paper except for a call for mass deportations, which he subsequently seemed to adjust spontaneously. He wants to rein in the Bank of England, possibly ditching its governor, Andrew Bailey, with distrust toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies appear to be in flux: wary of facing criticism for proposing a Liz Truss-style splurge, he recently dropped a promise to make large tax cuts. His Reform party deputy, Richard Tice, said they would focus instead on reductions in government expenditure.

Labour hopes this stance will enable it to depict Farage as intending to reintroduce fiscal tightening – an argument the chancellor has emphasized often, comparing it unfavorably to her strategy of increasing government spending.

Jo Michell says there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by very wealthy people demanding tax cuts and deregulation, yet also emphasizing the complaints of working people and the decline in manufacturing employment,” he explains. “There is a conflict there among wealthy supporters seeking radical free-market policies, and this narrative of bringing back UK employment and reindustrialisation.”

Holding on to Power

Realistically, research indicates populists of any stripe often perform poorly when confronting real-world challenges (though of course every populist leader promises something unique).

Recent research in the American Economic Review examined the outcomes of dozens of populist leaders, over more than a century. It found that on average, after 15 years, gross domestic product per head is often 10% lower in nations run by populist leaders than in similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically occur together with populist rule,” contend the paper’s authors.

Another intriguing finding from the study, however, is that even with their negative impacts, these leaders are often effective at holding on to power, lasting on average eight years, versus shorter tenures for mainstream politicians.

In other words, it remains uncertain that even when their plans crash, such leaders face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their attraction extends past everyday financial matters.

But returning to Buenos Aires, regardless of if Milei’s populist project fails or is sustained through foreign assistance, the Argentine people have already paid a heavy price.