Do Populist-Led Governments Inevitably Crash the Economic System?

“Dollars, dollars.” Under the scorching heat, scores of money changers are offering American currency on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a nation accustomed to saving in the US dollar.

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

Like her, economic experts from all backgrounds anticipate a depreciation of the Argentine peso after the voting is over. The president has imposed a limit on the peso to control triple-digit price increases and currently it remains overvalued and foreign reserves are depleted, leaving Argentina’s economy sluggish as consumers turn to cheap imports.

Fertile Ground

Argentina is a very special case. The country has been repeatedly racked by debt defaults and financial turmoil and its voters have been susceptible for decades to left-leaning populist movements, in the form of the influential Peronist movement, and now Milei’s conservative populism.

The president is a textbook populist: captivating, iconoclastic, promising forceful policies to wrestle back command of economic management from traditional elites on behalf of ordinary citizens.

These defining traits are shared by his political partner in the United States, and by the UK politician, who presents himself as a pint-swilling champion of the common man despite being a privately educated ex-finance professional.

Until recent months, Milei’s approach – including widespread sell-offs and deep public spending cuts – had won plaudits from the IMF for contributing to bring price rises under control. This plan shares similarities with that of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

But financial markets began losing confidence in Milei’s radical project in recent months following a shaky result in local polls and multiple corruption scandals. Solely large-scale financial intervention by the US has averted what looked set to become a major monetary collapse.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to implement public demand in the face of the establishment’s horror.

The Reform leader has so far outlined limited plans to paper except for a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He aims to rein in the central bank, possibly replacing its head, the incumbent, with scepticism of a stodgy establishment as a central element of the populist package.

His tax and spending policies seem in flux: concerned about facing criticism for planning a Liz Truss-style splurge, he lately abandoned a pledge for significant tax reductions. His second-in-command, the party chairman, said they would concentrate instead on public spending cuts.

The opposition hopes this position will enable it to portray the populist as planning to reintroduce fiscal tightening – an argument Rachel Reeves has made repeatedly, contrasting it with her approach of increasing public investment.

An economics professor notes there are contradictions within the populist platform, such as it is. “Reform is funded by affluent backers demanding lower taxes and reduced rules, yet also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict here between rich backers who want Thatcherism on steroids, and this narrative of restoring UK employment and industrial revival.”

Holding on to Power

In truth, research suggests neither left nor right populists often perform poorly when faced with practical difficulties (though of course each charismatic individual claims to offer something unique).

Recent research in the American Economic Review examined the performance of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, after 15 years, gross domestic product per head tends to be 10% lower in countries governed by populist rulers than in comparable countries under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance typically occur together with populist rule,” contend the paper’s authors.

Another intriguing finding from the study, however, is despite their economic costs, these leaders are often effective at retaining office, lasting on average eight years, versus shorter tenures for mainstream politicians.

In other words, it is not clear whether even if their plans crash, populists immediately pay the price in elections. Similar to pledges made to “take back control”, their appeal reaches beyond mundane economics.

But back in Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support by external aid, the Argentine people have already paid a heavy price.