Can Populist-Led Governments Inevitably Crash the Economic System?

“Cambio, cambio.” Beneath the blazing sun, dozens of currency traders are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a country accustomed to saving in the greenback.

“The optimal moment for purchasing is currently,” says a arbolito, refusing to provide her name. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”

Like her, economists across the spectrum expect a devaluation of the Argentine peso once the voting concludes. The president has imposed a limit on the currency to control soaring price increases and now it remains artificially high and reserves are exhausted, causing Argentina’s economy sluggish as buyers turn to cheap imports.

Ideal Conditions

The nation represents a unique situation. The country has frequently been hit by sovereign defaults and financial turmoil and the electorate have been receptive over the years to leftwing populism, such as the influential Peronist movement, and now the president’s rightwing version.

Milei epitomizes populist leadership: captivating, unconventional, promising forceful policies to reclaim control of the economy from the establishment on behalf of the people.

These key characteristics 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 former stockbroker.

Until recent months, Milei’s approach – involving extensive privatisations and severe budget reductions – had earned praise from international lenders for helping to bring price rises in check. This plan has something in common with that of Milei’s idol the former UK prime minister, who also saw rising prices as a monster to be defeated, no matter the cost.

However investors started to doubt in the government’s agenda in recent months after a poor performance in provincial elections and multiple corruption scandals. Only massive economic support from abroad has prevented what seemed destined to be a full-blown currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained similar reasoning, and its figurehead, the former prime minister, dismissed concerns regarding fiscal impacts with confident resolve to implement public demand in the face of the establishment’s horror.

The Reform leader has so far outlined limited plans to paper except for a call for large-scale removals, which he subsequently appeared to revise on the hoof. He aims to rein in the Bank of England, possibly ditching its governor, the incumbent, with distrust of a stodgy establishment being a key part of populist rhetoric.

His fiscal plans appear to be in flux: concerned about being accused of planning reckless spending, he lately dropped a pledge for significant tax reductions. His second-in-command, the party chairman, stated they would concentrate instead on reductions in government expenditure.

The opposition hopes this stance will enable it to portray Farage as intending to bring back austerity – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of increasing public investment.

Jo Michell says there are contradictions in Farage’s economic programme, as it stands. “The party are bankrolled by affluent backers demanding lower taxes and reduced rules, but also emphasizing the complaints of ordinary workers and the decline in manufacturing employment,” he explains. “There is a conflict here between rich backers seeking radical free-market policies, and this narrative of restoring British jobs and reindustrialisation.”

Maintaining Control

In truth, research indicates populists of any stripe tend to fare well when faced with real-world challenges (although each charismatic individual claims to offer distinct solutions).

A recent paper from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, over the long term, gross domestic product per head tends to be 10% lower in countries governed by populist leaders compared to similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically go hand in hand under populist governments,” contend the researchers.

A further interesting result of the research, however, is that despite their economic costs, these leaders are often effective at retaining office, remaining in power for eight years, versus four for their more moderate equivalents.

Put simply, it is not clear that even when their policies fail, such leaders face immediate consequences in elections. Similar to pledges made to regain sovereignty, their attraction extends past everyday financial matters.

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