Can Populist Governments Always Wreck the Economy?
“Cambio, cambio.” Beneath the scorching heat, dozens of currency traders are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 congressional elections in a country accustomed to saving in the greenback.
“The best time for purchasing is currently,” states a arbolito, declining to give her identity. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”
Similar to her, economists across the spectrum anticipate a depreciation of the national currency once the election concludes. The president has imposed a cap on the peso to control triple-digit inflation and currently it remains overvalued and reserves are depleted, leaving the national economy sluggish as buyers turn to cheap imports.
Fertile Ground
The nation is a very special case. Argentina has been repeatedly racked by debt defaults and economic crises and the electorate have been receptive for decades to left-leaning populist movements, in the form of the influential Peronist movement, and currently the president’s rightwing version.
The president epitomizes populist leadership: captivating, iconoclastic, vowing muscular measures to wrestle back command of economic management from the establishment for the benefit of the people.
These key characteristics are also seen in his ally to the north, as well as Nigel Farage, who presents himself as a beer-drinking people’s champion even though he is a public school-educated former stockbroker.
Until recent months, Milei’s approach – including extensive privatisations and severe public spending cuts – had won plaudits from the IMF for contributing to bring price rises in check. The programme has something in common with that of Milei’s idol the former UK prime minister, who also saw inflation as a monster to be slain, regardless of the consequences.
But investors began losing confidence in Milei’s radical project in recent months following a shaky result in provincial elections and multiple corruption scandals. Solely large-scale economic support from abroad has prevented what looked set to become a full-blown monetary collapse.
Contradictions
The vote for Brexit in 2016 likely contained some of the same logic, and its leader, the former prime minister, swept away doubts regarding fiscal impacts with a bullish determination to enact public demand in the face of elite opposition.
The Reform leader to date committed few policies to paper aside from proposals for mass deportations, which he subsequently seemed to adjust on the hoof. He aims to curb the central bank, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of the populist package.
His fiscal plans seem in flux: wary of facing criticism for planning a Liz Truss-style splurge, he lately dropped a pledge to make significant tax reductions. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.
The opposition hopes this stance will allow it to portray Farage as intending to bring back fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of boosting public investment.
Jo Michell notes there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by very wealthy people demanding tax cuts and deregulation, yet also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension here between wealthy supporters who want radical free-market policies, and this story of bringing back British jobs and reindustrialisation.”
Holding on to Power
In truth, research suggests neither left nor right populists often perform poorly when confronting real-world challenges (though of course every populist leader promises distinct solutions).
A recent paper from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed that on average, after 15 years, GDP per capita tends to be 10% lower in nations governed by populist leaders compared to comparable countries under conventional leadership.
“Economic disintegration, weakening economic fundamentals and the decay of governance typically occur together with populist rule,” argue the researchers.
Another intriguing finding of the research, however, is that despite their economic costs, these leaders are often effective at retaining office, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.
Put simply, it remains uncertain that even when their policies fail, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their attraction extends past mundane economics.
But back in Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, the Argentine people are already bearing significant costs.
