Can Populist Governments Inevitably Wreck the Economic System?

“Exchange, exchange.” Beneath the scorching heat, dozens of money changers are hawking US dollars along Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the October 26 midterm elections in a country long used to saving in the US dollar.

“The optimal moment for purchasing is now,” says a arbolito, declining to give her identity. “[The dollar] dropped a little but it’s deceptive – it will rebound.”

Like her, economists from all backgrounds expect a devaluation of the Argentine peso once the election is over. The president has imposed a limit on the currency to control soaring inflation and now it is artificially high and reserves are exhausted, leaving Argentina’s economy stagnant as consumers opt for low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has frequently been racked by sovereign defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, such as the influential Peronist movement, and now the president’s rightwing version.

Milei is a textbook populist: captivating, unconventional, vowing muscular measures to reclaim control of the economy from traditional elites for the benefit of ordinary citizens.

These defining traits are also seen in his ally to the north, as well as Nigel Farage, who styles himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, the president’s strategy – involving widespread sell-offs and severe budget reductions – had won plaudits from the IMF for helping to control inflation in check. This plan shares similarities with that of his political hero the former UK prime minister, who also saw inflation as a monster to be defeated, no matter the cost.

However investors began losing confidence in the government’s agenda in recent months following a shaky result in provincial elections and multiple graft allegations. Solely massive economic support by the US has averted what looked set to become a full-blown currency crisis.

Inconsistencies

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, Boris Johnson, dismissed doubts about economic detail with a bullish determination to enact public demand despite elite opposition.

Farage to date committed few policies in writing except for a call for mass deportations, which he subsequently appeared to revise spontaneously. He aims to rein in the Bank of England, perhaps even replacing its head, Andrew Bailey, with distrust toward traditional institutions as a central element of the populist package.

His fiscal plans seem in flux: concerned about facing criticism for planning reckless spending, he lately abandoned a promise for significant tax reductions. His Reform party deputy, Richard Tice, said they would focus instead on reductions in government expenditure.

The opposition hopes this position will enable it to portray Farage as planning to reintroduce austerity – a point the chancellor has emphasized often, 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 are bankrolled by very wealthy people demanding lower taxes and deregulation, but also emphasizing the grievances of working people and the loss of industrial jobs,” he says. “There’s a tension here between rich backers seeking radical free-market policies, and this narrative of bringing back UK employment and industrial revival.”

Maintaining Control

In truth, the evidence indicates neither left nor right populists tend to fare well when confronting practical difficulties (although every populist leader promises distinct solutions).

Recent research in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, over the long term, gross domestic product per head is often 10% lower in countries run by populist rulers than in similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand with populist rule,” argue the researchers.

A further interesting result from the study, though, is even with their negative impacts, populist figures are often effective at holding on to power, remaining in power for a considerable time, compared with shorter tenures for their more moderate equivalents.

In other words, it is not clear that even when their plans crash, populists immediately pay the price in elections. Like the Brexiters’ promise to “take back control”, their attraction extends past mundane economics.

Yet returning to Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, Argentina’s citizens are already bearing a heavy price.