Can Populist-Led Governments Inevitably Crash the Economic System?

“Dollars, dollars.” Beneath the blazing sun, scores of currency traders are offering US dollars along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the 26 October midterm elections in a country long used to saving in the greenback.

“The optimal moment to buy is currently,” states a arbolito, declining to give her identity. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Like her, economists from all backgrounds expect a depreciation of the national currency after the election concludes. President Javier Milei has placed a cap on the peso to control triple-digit inflation and now it remains artificially high and foreign reserves are exhausted, leaving the national economy sluggish as consumers turn to cheap imports.

Ideal Conditions

The nation is a very special case. The country has frequently been racked by debt defaults and financial turmoil and the electorate have been susceptible for decades to left-leaning populist movements, in the form of the powerful Peronist movement, and now the president’s conservative populism.

The president epitomizes populist leadership: charismatic, iconoclastic, vowing muscular policies to wrestle back control of economic management from the establishment for the benefit of the people.

These defining traits are also seen in his ally in the United States, as well as Nigel Farage, who styles himself as a beer-drinking people’s champion despite being a public school-educated former stockbroker.

Up until lately, Milei’s approach – including widespread sell-offs and severe public spending cuts – had earned praise from international lenders for helping to bring price rises under control. This plan has something in common with the policies of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.

However investors started to doubt in the government’s agenda in recent months after a poor performance in local polls and a series of graft allegations. Solely massive economic support by the US has prevented what seemed destined to be a full-blown currency crisis.

Inconsistencies

The 2016 referendum several years ago likely contained similar reasoning, and its leader, the former prime minister, dismissed concerns about economic detail with confident resolve to implement the “will of the people” despite elite opposition.

Farage to date outlined limited plans in writing aside from a call for large-scale removals, that he later appeared to revise on the hoof. He wants to rein in the central bank, perhaps even replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of populist rhetoric.

His fiscal plans appear to be unsettled: concerned about being accused of planning a Liz Truss-style splurge, he lately abandoned a promise to make large tax reductions. His second-in-command, the party chairman, stated they would focus instead on public spending cuts.

The opposition aims this stance will allow it to depict the populist as planning to reintroduce austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her strategy of boosting public investment.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “Reform is funded by affluent backers demanding tax cuts and reduced rules, but also emphasizing the grievances of working people and the loss of industrial jobs,” he explains. “There is a conflict there among rich backers seeking radical free-market policies, and this story of restoring UK employment and industrial revival.”

Maintaining Control

In truth, the evidence suggests populists of any stripe often perform poorly when confronting real-world challenges (although each charismatic individual promises something unique).

A recent paper from a leading journal analysed the performance of dozens of populist leaders, from 1900 to 2020. It found typically, after 15 years, gross domestic product per head tends to be 10% lower in nations run by populist leaders compared to comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually go hand in hand under populist governments,” contend the researchers.

Another intriguing finding from the study, however, is despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for a considerable time, compared with four for mainstream politicians.

In other words, it remains uncertain that even when their policies fail, such leaders immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

Yet back in Buenos Aires, whether Milei’s populist project fails or is kept on life support through foreign assistance, the Argentine people are already bearing a heavy price.