Do Populist-Led Governments Always Crash the Economy?

“Exchange, exchange.” Under the scorching heat, dozens of currency traders are selling US dollars along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving before the October 26 midterm elections in a country accustomed to holding the greenback.

“The optimal moment for purchasing is currently,” states one arbolito, declining to give her name. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Similar to her, economists across the spectrum anticipate a depreciation of the Argentine peso once the election is over. The president has imposed a limit on the peso to tame triple-digit price increases and now it remains overvalued and foreign reserves are depleted, causing Argentina’s economy sluggish as buyers turn to cheap imports.

Ideal Conditions

The nation represents a unique situation. Argentina has been repeatedly hit by debt defaults and economic crises and the electorate have been susceptible for decades to left-leaning populist movements, such as the powerful Peronist movement, and now Milei’s rightwing version.

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

These defining traits are also seen in his ally to the north, as well as Nigel Farage, who presents himself as a pint-swilling champion of the common man despite being a privately educated ex-finance professional.

Up until lately, the president’s strategy – including widespread sell-offs and severe public spending cuts – had earned praise from international lenders for helping to control price rises under control. The programme has something in common with the policies of Milei’s idol the former UK prime minister, who also saw inflation as a monster to be defeated, regardless of the consequences.

However financial markets started to doubt in the government’s agenda lately following a shaky result in local polls and multiple graft allegations. Only massive economic support from abroad has prevented what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The vote for Brexit several years ago arguably had similar reasoning, and its figurehead, the former prime minister, dismissed concerns about economic detail with a bullish determination to implement public demand in the face of elite opposition.

Farage to date committed few policies in writing except for a call for mass deportations, that he later appeared to revise on the hoof. He aims to rein in the central bank, possibly replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies seem in flux: wary of being accused of planning reckless spending, he recently dropped a promise for large tax reductions. His second-in-command, the party chairman, said they would concentrate instead on reductions in government expenditure.

The opposition hopes this position will allow it to depict the populist as planning to reintroduce fiscal tightening – a point the chancellor has made repeatedly, comparing it unfavorably to her approach of boosting public investment.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by affluent backers demanding lower taxes and deregulation, but also emphasizing the grievances of working people and the decline in manufacturing employment,” he says. “There is a conflict here among wealthy supporters who want Thatcherism on steroids, and this story of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, research suggests neither left nor right populists often perform poorly when faced with 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, over more than a century. It found that on average, over the long term, gross domestic product per head is often 10% lower in countries run by populist rulers compared to comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” contend the paper’s authors.

Another intriguing finding of the research, though, is that even with their negative impacts, these leaders are often effective at holding on to power, remaining in power for a considerable time, compared with four for mainstream politicians.

Put simply, it is not clear whether even if their plans crash, such leaders face immediate consequences in elections. Similar to pledges made to “take back control”, their appeal extends past everyday financial matters.

But back in Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, the Argentine people are already bearing a heavy price.