Do Populist Governments Inevitably Wreck the Economy?

“Dollars, dollars.” Under the scorching heat, scores of money changers are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the 26 October midterm elections in a country long used to saving in the greenback.

“The optimal moment for purchasing is currently,” says a arbolito, refusing to provide her identity. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Similar to her, economic experts across the spectrum expect a depreciation of the national currency after the election concludes. The president has placed a cap on the peso to tame triple-digit inflation and now it remains overvalued and foreign reserves are exhausted, causing the national economy stagnant as consumers opt for 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 the electorate have been susceptible for decades to left-leaning populist movements, such as the powerful Peronism, and now Milei’s rightwing version.

Milei is a textbook populist: captivating, iconoclastic, vowing muscular policies to reclaim control of economic management from traditional elites for the benefit of ordinary citizens.

These defining traits are also seen in his ally to the north, and by the UK politician, who presents himself as a pint-swilling people’s champion despite being a public school-educated ex-finance professional.

Until recent months, the president’s strategy – including widespread sell-offs and deep public spending cuts – had earned praise from the IMF for contributing to control price rises under control. The programme has something in common with the policies of Milei’s idol Margaret Thatcher, who also saw rising prices as a monster to be defeated, regardless of the consequences.

But investors started to doubt in the government’s agenda lately after a shaky result in provincial elections and a series of 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 several years ago arguably had similar reasoning, and its leader, Boris Johnson, dismissed concerns about economic detail with confident resolve to implement public demand despite the establishment’s horror.

Farage to date outlined limited plans in writing except for a call for mass deportations, which he subsequently appeared to revise spontaneously. He aims to curb the Bank of England, possibly replacing its head, Andrew Bailey, with scepticism toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies appear to be unsettled: concerned about being accused of planning a Liz Truss-style splurge, he recently abandoned a pledge for significant tax reductions. His second-in-command, Richard Tice, said they would concentrate instead on public spending cuts.

The opposition aims this stance will enable it to portray the populist as intending to bring back fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with her strategy of boosting government spending.

An economics professor notes there exist inconsistencies within the populist platform, such as it is. “Reform are bankrolled by affluent backers demanding lower taxes and deregulation, but also emphasizing the complaints of ordinary workers and the decline in manufacturing employment,” he says. “There is a conflict there between wealthy supporters who want Thatcherism on steroids, and this narrative of bringing back British jobs and industrial revival.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well when faced with practical difficulties (though of course each charismatic individual claims to offer something unique).

Recent research from a leading journal examined the outcomes of dozens of populist leaders, over more than a century. The study revealed typically, after 15 years, gross domestic product per head tends to be a tenth less in nations run by populist rulers compared to similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the decay of governance typically go hand in hand with populist rule,” contend the paper’s authors.

A further interesting result of the research, however, is that even with their negative impacts, populist figures are often effective at retaining office, lasting on average a considerable time, versus four for their more moderate equivalents.

Put simply, it remains uncertain that even when their policies fail, such leaders face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their appeal extends past everyday financial matters.

Yet returning to Buenos Aires, regardless of if the government’s agenda collapses or is sustained by external aid, Argentina’s citizens are already bearing significant costs.