Do Populist Governments Always Wreck the Economic System?

“Dollars, dollars.” Under the scorching heat, dozens of currency traders are hawking American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), their business is booming ahead of the 26 October midterm elections in a nation long used to saving in the greenback.

“The optimal moment to buy is currently,” states a arbolito, refusing to provide her name. “[The dollar] dropped a little but it is a fake-out – it will rebound.”

Similar to her, economic experts from all backgrounds anticipate a depreciation of the national currency after the election is over. The president has placed a limit on the currency to tame triple-digit inflation and now it remains overvalued and foreign reserves are depleted, leaving the national economy sluggish as buyers opt for low-cost foreign goods.

Ideal Conditions

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

The president epitomizes populist leadership: charismatic, iconoclastic, vowing muscular measures to reclaim command of the economy from the establishment on behalf of ordinary citizens.

These key characteristics are shared by his ally to the north, and by the UK politician, who styles himself as a pint-swilling champion of the common man despite being a public school-educated former stockbroker.

Up until lately, the president’s strategy – including extensive privatisations and deep budget reductions – had earned praise from international lenders for contributing to control inflation in check. The programme shares similarities with the policies of his political hero Margaret Thatcher, who also saw inflation as a dragon to be slain, no matter the cost.

But financial markets started to doubt in Milei’s radical project lately after a poor performance in local polls and a series of graft allegations. Only large-scale financial intervention from abroad has prevented what looked set to become a major monetary collapse.

Contradictions

The vote for Brexit in 2016 arguably had similar reasoning, and its leader, Boris Johnson, dismissed doubts regarding fiscal impacts with confident resolve to enact public demand despite the establishment’s horror.

Farage to date committed few policies to paper except for proposals for mass deportations, that he later seemed to adjust spontaneously. He aims to curb the central bank, possibly replacing its head, Andrew Bailey, with scepticism toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies appear to be unsettled: concerned about being accused of planning reckless spending, he recently dropped a pledge for significant tax reductions. His Reform party deputy, the party chairman, stated they would focus instead on public spending cuts.

Labour hopes this stance will allow it to portray Farage as planning to reintroduce fiscal tightening – a point Rachel Reeves has emphasized often, comparing it unfavorably to her strategy of boosting public investment.

An economics professor says there exist inconsistencies within the populist platform, such as it is. “The party is funded by very wealthy people calling for tax cuts and deregulation, but also talking a lot about the grievances of working people and the loss of industrial jobs,” he explains. “There is a conflict here between wealthy supporters seeking Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

In truth, research suggests neither left nor right populists often perform poorly when faced with real-world challenges (although each charismatic individual promises something unique).

A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, GDP per capita tends to be 10% lower in nations governed by populist leaders than in similar economies with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” contend the researchers.

A further interesting result of the research, however, is even with their negative impacts, these leaders tend to be good at retaining office, remaining in power for a considerable time, compared with shorter tenures for mainstream politicians.

In other words, it remains uncertain whether even if their plans crash, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their attraction extends past everyday financial matters.

Yet back in Buenos Aires, whether the government’s agenda collapses or is sustained through foreign assistance, the Argentine people are already bearing significant costs.