Can Populist-Led Governments Inevitably Crash the Economic System?

“Cambio, cambio.” Beneath the blazing sun, scores of currency traders are offering US dollars on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 midterm elections in a nation accustomed to holding the greenback.

“The optimal moment for purchasing is currently,” states a arbolito, declining to give her identity. “[The dollar] went down a little but it is a fake-out – it will rebound.”

Similar to her, economists from all backgrounds expect a devaluation of the Argentine peso after the voting concludes. President Javier Milei has imposed a limit on the currency to tame triple-digit price increases and currently it remains artificially high and foreign reserves are depleted, causing Argentina’s economy stagnant as consumers turn to cheap imports.

Ideal Conditions

Argentina is a very special case. Argentina has frequently been hit by debt defaults and financial turmoil and the electorate have been receptive over the years to leftwing populism, in the form of the influential Peronist movement, and currently the president’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, promising forceful policies to wrestle back command of the economy from the establishment for the benefit of the people.

These defining traits are also seen in his ally to the north, and by Nigel Farage, who presents himself as a pint-swilling people’s champion even though he is a privately educated former stockbroker.

Until recent months, the president’s strategy – involving widespread sell-offs and severe budget reductions – had won plaudits from international lenders for contributing to bring price rises in check. The programme shares similarities with that of Milei’s idol the former UK prime minister, who also saw rising prices as a monster to be defeated, no matter the cost.

However investors started to doubt in the government’s agenda in recent months after a poor performance in local polls and a series of corruption scandals. Only large-scale economic support from abroad has averted what seemed destined to be a full-blown monetary collapse.

Contradictions

The vote for Brexit several years ago likely contained some of the same logic, and its leader, the former prime minister, dismissed doubts about economic detail with a bullish determination to implement public demand in the face of the establishment’s horror.

Farage to date outlined limited plans in writing except for a call for mass deportations, that he later appeared to revise spontaneously. He wants to rein in the central bank, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of populist rhetoric.

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

Labour aims this position will allow it to depict the populist as intending to reintroduce austerity – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of boosting public investment.

An economics professor notes there are contradictions in Farage’s economic programme, as it stands. “Reform are bankrolled by affluent backers calling for lower taxes and reduced rules, but also emphasizing the complaints of working people and the loss of industrial jobs,” he says. “There is a conflict here between rich backers who want Thatcherism on steroids, and this story of restoring British jobs and industrial revival.”

Maintaining Control

Realistically, the evidence suggests populists of any stripe often perform poorly when confronting real-world challenges (although each charismatic individual claims to offer something unique).

Recent research from a leading journal examined the performance of dozens of populist leaders, over more than a century. It found typically, after 15 years, GDP per capita is often 10% lower in nations run by populist rulers than in comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand with populist rule,” argue the researchers.

Another intriguing finding from the study, however, is that despite their economic costs, populist figures tend to be good at retaining office, remaining in power for eight years, compared with shorter tenures for their more moderate equivalents.

Put simply, it remains uncertain that even when their policies fail, such leaders face immediate consequences in elections. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people have already paid a heavy price.