Can Populist Governments Inevitably Wreck the Economy?
“Cambio, cambio.” Beneath the scorching heat, scores of money changers are offering American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the October 26 congressional elections in a country accustomed to holding the US dollar.
“The best time for purchasing is currently,” states one arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”
Similar to her, economists across the spectrum anticipate a depreciation of the national currency after the voting concludes. President Javier Milei has imposed a limit on the peso to tame triple-digit inflation and now it remains overvalued and reserves are exhausted, leaving the national economy sluggish as consumers opt for low-cost foreign goods.
Ideal Conditions
The nation is a very special case. Argentina has frequently been racked by sovereign defaults and financial turmoil and its voters have been receptive for decades to left-leaning populist movements, such as the influential Peronist movement, and currently the president’s rightwing version.
The president is a textbook populist: captivating, unconventional, promising forceful measures to wrestle back control of economic management from the establishment on behalf of ordinary citizens.
These key characteristics are also seen in his political partner in the United States, as well as Nigel Farage, who presents himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.
Up until lately, the president’s strategy – including extensive privatisations and severe public spending cuts – had earned praise from the IMF for helping to bring price rises under control. The programme shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a monster to be defeated, no matter the cost.
However financial markets began losing confidence in Milei’s radical project in recent months following a poor performance in local polls and multiple corruption scandals. Solely massive financial intervention from abroad has prevented what looked set to become a full-blown currency crisis.
Inconsistencies
The 2016 referendum several years ago arguably had similar reasoning, and its leader, Boris Johnson, dismissed concerns regarding fiscal impacts with confident resolve to implement public demand in the face of elite opposition.
The Reform leader to date committed few policies to paper aside from proposals for mass deportations, that he later seemed to adjust spontaneously. He wants to curb the Bank of England, possibly replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of the populist package.
His fiscal plans seem unsettled: concerned about facing criticism for planning reckless spending, he lately dropped a pledge to make large tax cuts. His Reform party deputy, the party chairman, stated they would concentrate instead on reductions in government expenditure.
Labour hopes this stance will allow it to portray Farage as planning to reintroduce austerity – an argument the chancellor has made repeatedly, contrasting it with her strategy of increasing public investment.
Jo Michell notes there are contradictions within the populist platform, such as it is. “The party is funded by very wealthy people calling for lower taxes and reduced rules, but also emphasizing the grievances of ordinary workers and the decline in manufacturing employment,” he explains. “There’s a tension there among rich backers seeking radical free-market policies, and this story of restoring British jobs and reindustrialisation.”
Holding on to Power
Realistically, research indicates neither left nor right populists tend to fare well when faced with practical difficulties (although every populist leader promises distinct solutions).
A recent paper in the American Economic Review examined the performance of dozens of populist leaders, 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 rulers than in similar economies under conventional leadership.
“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” contend the paper’s authors.
Another intriguing finding of the research, though, is that even with their negative impacts, populist figures tend to be good at holding on to power, remaining in power for a considerable time, compared with four for mainstream politicians.
Put simply, it is not clear whether even if their policies fail, such leaders immediately pay the price in elections. Like the Brexiters’ promise to “take back control”, their appeal reaches beyond everyday financial matters.
Yet returning to Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people are already bearing significant costs.
