Do Populist-Led Governments Always Wreck the Economy?
“Exchange, exchange.” Beneath the blazing sun, dozens of currency traders are selling US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), their business is booming ahead of the 26 October midterm elections in a country accustomed to saving in the US dollar.
“The best time to buy is now,” states one arbolito, declining to give her identity. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”
Like her, economic experts across the spectrum expect a depreciation of the national currency once the voting is over. The president has placed a cap on the peso to tame soaring inflation and currently it remains artificially high and foreign reserves are exhausted, causing the national economy stagnant as consumers turn to cheap imports.
Fertile Ground
Argentina is a very special case. Argentina has been repeatedly hit by sovereign defaults and economic crises and its voters have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronist movement, and currently Milei’s rightwing version.
The president is a textbook populist: charismatic, iconoclastic, promising forceful policies to reclaim control of the economy from traditional elites for the benefit of the people.
These defining traits are shared by his political partner to the north, as well as the UK politician, who styles himself as a pint-swilling champion of the common man despite being a privately educated former stockbroker.
Until recent months, the president’s strategy – involving widespread sell-offs and severe public spending cuts – had earned praise from international lenders for contributing to bring price rises under control. This plan has something in common with the policies of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be slain, no matter the cost.
However investors began losing confidence in Milei’s radical project lately after a poor performance in provincial elections and a series of corruption scandals. Solely massive economic support from abroad has prevented what seemed destined to be a major currency crisis.
Contradictions
The 2016 referendum several years ago likely contained some of the same logic, and its figurehead, Boris Johnson, swept away doubts regarding fiscal impacts with a bullish determination to implement the “will of the people” despite the establishment’s horror.
The Reform leader has so far outlined limited plans in writing except for a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to curb the central bank, possibly ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment as a central element of the populist package.
His tax and spending policies appear to be unsettled: wary of facing criticism for proposing reckless spending, he recently dropped a pledge to make large tax cuts. His Reform party deputy, Richard Tice, stated they would concentrate instead on public spending cuts.
The opposition aims this stance will enable it to depict the populist as planning to bring back austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of increasing government spending.
Jo Michell notes there are contradictions within the populist platform, such as it is. “Reform are bankrolled by very wealthy people demanding lower taxes and deregulation, yet also talking a lot about the complaints of working people and the decline of industrial jobs,” he says. “There’s a tension here among wealthy supporters who want radical free-market policies, and this narrative of bringing back UK employment and industrial revival.”
Maintaining Control
In truth, the evidence suggests neither left nor right populists often perform poorly when faced with practical difficulties (though of course every populist leader promises something unique).
Recent research from a leading journal examined the performance 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 nations governed by populist leaders than in comparable countries under conventional leadership.
“Economic disintegration, weakening economic fundamentals and the decay of governance usually occur together under populist governments,” argue the researchers.
A further interesting result from the study, however, is that even with their negative impacts, these leaders are often effective at retaining office, remaining in power for a considerable time, compared with shorter tenures for mainstream politicians.
Put simply, 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 appeal reaches beyond mundane economics.
Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.
