Can Populist Governments Always Wreck the Economy?
“Dollars, dollars.” Beneath the scorching heat, scores of currency traders are selling US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a nation long used to holding the US dollar.
“The best time to buy is currently,” says a arbolito, declining to give her identity. “[The dollar] dropped a little but it is a fake-out – it will rebound.”
Similar to her, economists across the spectrum expect a depreciation of the national currency once the voting concludes. The president has placed a cap on the currency to tame triple-digit inflation and now it is overvalued and reserves are exhausted, causing 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 sovereign defaults and financial turmoil and the electorate have been receptive for decades to left-leaning populist movements, in the form of the influential Peronism, and currently the president’s rightwing version.
Milei epitomizes populist leadership: captivating, iconoclastic, vowing muscular measures to wrestle back command of economic management from traditional elites for the benefit of ordinary citizens.
These defining traits are shared by his political partner to the north, as well as Nigel Farage, who styles himself as a beer-drinking people’s champion despite being a public school-educated ex-finance professional.
Until recent months, Milei’s approach – including widespread sell-offs and severe budget reductions – had earned praise from international lenders for contributing to bring inflation in check. The programme shares similarities with the policies of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be slain, no matter the cost.
However financial markets began losing confidence in Milei’s radical project in recent months following a poor performance in provincial elections and multiple corruption scandals. Solely massive financial intervention by the US has prevented what seemed destined to be a full-blown currency crisis.
Contradictions
The vote for Brexit in 2016 arguably had some of the same logic, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to enact the “will of the people” in the face of elite opposition.
The Reform leader to date outlined limited plans in writing aside from a call for mass deportations, which he subsequently appeared to revise spontaneously. He aims to rein in the central bank, perhaps even replacing its head, Andrew Bailey, with scepticism toward traditional institutions as a central element of the populist package.
His fiscal plans seem in flux: concerned about being accused of planning a Liz Truss-style splurge, he lately dropped a pledge to make large 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 portray the populist as planning to reintroduce austerity – a point the chancellor has emphasized often, contrasting it with her approach of increasing public investment.
Jo Michell notes there exist inconsistencies in Farage’s economic programme, as it stands. “Reform is funded by very wealthy people demanding tax cuts and reduced rules, yet also talking a lot about the grievances of working people and the loss in manufacturing employment,” he explains. “There is a conflict there between wealthy supporters who want radical free-market policies, and this narrative of restoring British jobs and reindustrialisation.”
Maintaining Control
In truth, the evidence suggests neither left nor right populists often perform poorly when faced with practical difficulties (though of course every populist leader claims to offer distinct solutions).
A recent paper in the American Economic Review analysed the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, after 15 years, gross domestic product per head tends to be 10% lower in countries run by populist leaders than in similar economies under conventional leadership.
“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” argue the researchers.
A further interesting result of the research, however, is 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 shorter tenures for mainstream politicians.
In other words, it remains uncertain whether even if their plans crash, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their attraction extends past everyday financial matters.
Yet returning to Buenos Aires, regardless of if Milei’s populist project collapses or is sustained by external aid, the Argentine people have already paid significant costs.
