Do Populist Governments Inevitably Wreck the Economic System?

“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are hawking US dollars on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the 26 October congressional elections in a country accustomed to holding the US dollar.

“The optimal moment to buy is currently,” says one arbolito, refusing to provide her name. “[The dollar] went down a little but it is a fake-out – it will rebound.”

Similar to her, economists across the spectrum expect a devaluation of the national currency once the election concludes. President Javier Milei has placed a cap on the peso to tame soaring inflation and currently it remains artificially high and reserves are depleted, leaving the national economy stagnant as buyers turn to cheap imports.

Ideal Conditions

The nation is a very special case. Argentina has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been susceptible for decades to left-leaning populist movements, in the form of the powerful Peronism, and currently the president’s rightwing version.

Milei epitomizes populist leadership: charismatic, unconventional, promising muscular policies to reclaim command of economic management from the establishment for the benefit of ordinary citizens.

These defining traits are shared by his ally in the United States, and by the UK politician, who styles himself as a pint-swilling champion of the common man even though he is a public school-educated former stockbroker.

Up until lately, Milei’s approach – involving widespread sell-offs and severe public spending cuts – had won plaudits from international lenders for contributing to control inflation in check. The programme has something in common with that of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

But financial markets began losing confidence in the government’s agenda in recent months after a shaky result in provincial elections and multiple corruption scandals. Only massive economic support by the US has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, swept away concerns regarding fiscal impacts with confident resolve to enact public demand despite the establishment’s horror.

Farage to date outlined limited plans in writing except for a call for mass deportations, that he later seemed to adjust on the hoof. He wants to curb the central bank, perhaps even replacing its head, the incumbent, with distrust toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies seem in flux: concerned about facing criticism for proposing reckless spending, he lately abandoned a promise for large tax cuts. His second-in-command, the party chairman, said they would concentrate instead on public spending cuts.

Labour aims this stance will allow it to depict Farage as planning to bring back austerity – a point Rachel Reeves has made repeatedly, contrasting it with her strategy of boosting public investment.

An economics professor notes there exist inconsistencies in Farage’s economic programme, such as it is. “Reform is funded by affluent backers calling for tax cuts and reduced rules, but also talking a lot about the complaints of ordinary workers and the loss in manufacturing employment,” he explains. “There is a conflict there between rich backers seeking Thatcherism on steroids, and this narrative of restoring British jobs and industrial revival.”

Holding on to Power

In truth, the evidence suggests populists of any stripe tend to fare well when faced with real-world challenges (although each charismatic individual promises something unique).

A recent paper from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, GDP per capita is often 10% lower in nations run by populist rulers than in similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically occur together with populist rule,” argue the researchers.

A further interesting result from the study, however, is even with their negative impacts, populist figures are often effective at retaining office, lasting on average eight years, compared with four for mainstream politicians.

In other words, it remains uncertain whether even if their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past mundane economics.

But back in Buenos Aires, regardless of if Milei’s populist project collapses or is sustained by external aid, Argentina’s citizens have already paid significant costs.