Do Populist-Led Governments Inevitably Crash the Economy?

“Cambio, cambio.” Beneath the blazing sun, dozens of currency traders are hawking American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a country accustomed to holding the US dollar.

“The best time for purchasing is currently,” says a arbolito, refusing to provide her identity. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Like her, economists across the spectrum anticipate a depreciation of the national currency once the voting concludes. President Javier Milei has imposed a cap on the peso to tame soaring price increases and now it remains overvalued and reserves are exhausted, leaving the national economy stagnant as buyers opt for cheap imports.

Fertile Ground

The nation represents a unique situation. Argentina has been repeatedly racked by debt defaults and financial turmoil and its voters have been susceptible for decades to leftwing populism, such as the influential Peronism, and now Milei’s rightwing version.

Milei is a textbook populist: captivating, unconventional, promising forceful measures to reclaim command of economic management from the establishment for the benefit of the people.

These defining traits are also seen in his ally to the north, and by the UK politician, who presents himself as a beer-drinking champion of the common man despite being a privately educated ex-finance professional.

Until recent months, Milei’s approach – including extensive privatisations and deep public spending cuts – had earned praise from international lenders for contributing to bring inflation under control. The programme shares similarities with the policies of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

But financial markets started to doubt in the government’s agenda in recent months following a shaky result in provincial elections and a series of corruption scandals. Only large-scale economic support from abroad has prevented what looked set to become a major currency crisis.

Contradictions

The vote for Brexit several years ago arguably had similar reasoning, and its leader, Boris Johnson, swept away concerns about economic detail with confident resolve to implement the “will of the people” despite the establishment’s horror.

Farage to date outlined limited plans in writing aside from proposals for large-scale removals, that he later seemed to adjust spontaneously. He wants to curb the central bank, possibly replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of populist rhetoric.

His fiscal plans seem in flux: concerned about being accused of proposing reckless spending, he recently abandoned a promise for significant tax cuts. His Reform party deputy, Richard Tice, said they would focus instead on reductions in government expenditure.

The opposition aims this position will enable it to portray the populist as intending to bring back fiscal tightening – an argument Rachel Reeves has emphasized often, contrasting it with her approach of increasing government spending.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people demanding tax cuts and reduced rules, yet also talking a lot about the complaints of ordinary workers and the decline of industrial jobs,” he says. “There’s a tension here between wealthy supporters who want radical free-market policies, and this story of bringing back UK employment and industrial revival.”

Holding on to Power

Realistically, the evidence indicates populists of any stripe tend to fare well when confronting practical difficulties (though of course each charismatic individual promises something unique).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, after 15 years, gross domestic product per head is often a tenth less in countries governed by populist rulers than in similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically occur together under populist governments,” contend the researchers.

Another intriguing finding of the research, though, is that even with their negative impacts, these leaders are often effective at holding on to power, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.

Put simply, it remains uncertain that even when their plans crash, populists face immediate consequences in elections. Similar to pledges made to “take back control”, their attraction extends past everyday financial matters.

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