Do Populist Governments Inevitably Crash the Economy?
“Cambio, cambio.” Beneath the blazing sun, dozens of money changers are selling US dollars along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the October 26 midterm elections in a country long used to saving in the US dollar.
“The optimal moment to buy is currently,” says one arbolito, declining to give her name. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”
Similar to her, economic experts across the spectrum anticipate a devaluation of the Argentine peso after the voting concludes. The president has placed a cap on the currency to tame soaring price increases and now it is overvalued and reserves are exhausted, causing Argentina’s economy sluggish as buyers turn to low-cost foreign goods.
Fertile Ground
Argentina is a very special case. The country 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 powerful Peronist movement, and now Milei’s conservative populism.
Milei is a textbook populist: captivating, iconoclastic, vowing muscular policies to wrestle back command of economic management from the establishment for the benefit of ordinary citizens.
These defining traits are also seen in his political partner 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 ex-finance professional.
Up until lately, the president’s strategy – involving extensive privatisations and deep budget reductions – had earned praise from the IMF for helping to bring price rises under control. The programme shares similarities with the policies of Milei’s idol the former UK prime minister, who also saw inflation as a monster to be defeated, regardless of the consequences.
However financial markets began losing confidence in Milei’s radical project in recent months following a shaky result in local polls and a series of corruption scandals. Only massive financial intervention by the US has prevented what seemed destined to be a major currency crisis.
Inconsistencies
The 2016 referendum in 2016 arguably had some of the same logic, and its figurehead, the former prime minister, swept away concerns about economic detail with confident resolve to implement the “will of the people” despite elite opposition.
The Reform leader has so far outlined limited plans to paper except for proposals for large-scale removals, that he later seemed to adjust spontaneously. He aims to curb the central bank, possibly replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of the populist package.
His fiscal plans appear to be unsettled: wary of facing criticism for planning a Liz Truss-style splurge, he recently abandoned a promise to make large tax cuts. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.
Labour hopes this position will allow it to depict the populist as intending to reintroduce austerity – a point the chancellor has made repeatedly, contrasting it with her strategy of boosting public investment.
An economics professor says there are contradictions within the populist platform, as it stands. “Reform is funded by very wealthy people calling for lower taxes and reduced rules, yet also emphasizing the complaints of working people and the decline of industrial jobs,” he says. “There is a conflict there between wealthy supporters who want radical free-market policies, and this narrative of bringing back British jobs and reindustrialisation.”
Maintaining Control
In truth, the evidence indicates populists of any stripe tend to fare well when faced with real-world challenges (although every populist leader promises distinct solutions).
A recent paper from a leading journal analysed the performance of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, after 15 years, gross domestic product per head tends to be 10% lower in countries run by populist rulers than in comparable countries with more mainstream regimes.
“Economic disintegration, weakening economic fundamentals and the decay of governance typically go hand in hand with populist rule,” argue the paper’s authors.
A further interesting result from the study, however, is even with their negative impacts, populist figures tend to be good at holding on to power, lasting on average a considerable time, versus four for their more moderate equivalents.
In other words, it is not clear whether even if their policies fail, such leaders face immediate consequences in elections. Similar to pledges made to “take back control”, their attraction reaches beyond mundane economics.
But back in Buenos Aires, whether the government’s agenda fails or is sustained through foreign assistance, Argentina’s citizens are already bearing significant costs.
