Can Populist Governments Always Wreck the Economy?
“Cambio, cambio.” Beneath the scorching heat, dozens of money changers are selling US dollars on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the October 26 midterm elections in a country long used to holding the greenback.
“The best time to buy is currently,” states one arbolito, declining to give her identity. “[The dollar] went down a little but it’s deceptive – it will rebound.”
Like her, economists across the spectrum anticipate a depreciation of the Argentine peso once the voting is over. The president has placed a cap on the peso to tame triple-digit price increases and now it is artificially high and reserves are exhausted, causing Argentina’s economy sluggish as buyers opt for cheap imports.
Fertile Ground
The nation represents a unique situation. The country has frequently been hit by debt defaults and financial turmoil and the electorate have been receptive over the years to leftwing populism, such as the influential Peronist movement, and now the president’s rightwing version.
The president is a textbook populist: charismatic, unconventional, promising muscular policies to reclaim command of economic management from the establishment on behalf of ordinary citizens.
These defining traits are also seen in his ally in the United States, and by Nigel Farage, who styles himself as a pint-swilling champion of the common man even though he is a public school-educated former stockbroker.
Until recent months, the president’s strategy – including extensive privatisations and severe public spending cuts – had won plaudits from international lenders for helping to bring inflation under control. The programme shares similarities with the policies of his political hero the former UK prime minister, who also saw inflation as a dragon to be defeated, no matter the cost.
However investors began losing confidence in the government’s agenda lately following a shaky result in provincial elections and a series of corruption scandals. Solely massive economic support by the US has prevented what seemed destined to be a major currency crisis.
Contradictions
The vote for Brexit several years ago likely contained similar reasoning, and its figurehead, Boris Johnson, swept away doubts regarding fiscal impacts with confident resolve to implement the “will of the people” despite elite opposition.
The Reform leader has so far committed few policies to paper aside from proposals for mass deportations, that he later seemed to adjust spontaneously. He aims to curb the central bank, possibly replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of the populist package.
His tax and spending policies seem in flux: wary of facing criticism for proposing reckless spending, he recently abandoned a pledge for significant tax cuts. His Reform party deputy, the party chairman, said they would focus instead on public spending cuts.
Labour hopes this stance will enable it to depict Farage as planning to bring back fiscal tightening – an argument Rachel Reeves has emphasized often, contrasting it with her approach of increasing public investment.
An economics professor notes there are contradictions in Farage’s economic programme, as it stands. “Reform are bankrolled by very wealthy people calling for lower taxes and reduced rules, but also emphasizing the complaints of working people and the loss of industrial jobs,” he says. “There’s a tension there between rich backers seeking Thatcherism on steroids, and this story of bringing back British jobs and industrial revival.”
Holding on to Power
Realistically, research suggests neither left nor right populists tend to fare well when confronting real-world challenges (though of course each charismatic individual promises distinct solutions).
Recent research in the American Economic Review analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, after 15 years, GDP per capita is often a tenth less in countries governed by populist rulers than in comparable countries with more mainstream regimes.
“Financial decline, decreasing macroeconomic stability and the erosion of institutions typically occur together with populist rule,” contend the researchers.
A further interesting result from the study, though, is that even with their negative impacts, these leaders tend to be good at retaining office, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.
In other words, it is not clear that even when their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal extends past everyday financial matters.
Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.
