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Can Populist-Led Governments Always Wreck the Economy?
“Cambio, cambio.” Under the blazing sun, dozens of currency traders are hawking US dollars on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 midterm elections in a country long used to holding the US dollar.
“The optimal moment to buy is currently,” states a arbolito, refusing to provide her identity. “[The dollar] went down a little but it is a fake-out – it will rebound.”
Similar to her, economists from all backgrounds expect a devaluation of the Argentine peso once the voting is over. The president has placed a limit on the peso to control triple-digit price increases and now it is artificially high and foreign reserves are depleted, causing Argentina’s economy sluggish as buyers turn to cheap imports.
Fertile Ground
Argentina represents a unique situation. Argentina has frequently been hit by sovereign defaults and financial turmoil and the electorate have been susceptible for decades to leftwing populism, such as the powerful Peronism, and now Milei’s rightwing version.
Milei is a textbook populist: charismatic, unconventional, promising muscular measures to wrestle back control of economic management from the establishment for the benefit of ordinary citizens.
These defining traits are shared by his ally in the United States, as well as the UK politician, who presents himself as a beer-drinking champion of the common man even though he is a public school-educated ex-finance professional.
Until recent months, the president’s strategy – involving widespread sell-offs and severe public spending cuts – had won plaudits from international lenders for contributing to bring inflation under control. This plan shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed inflation as a dragon to be defeated, regardless of the consequences.
However financial markets began losing confidence in Milei’s radical project lately after a shaky result in provincial elections and multiple corruption scandals. Solely large-scale financial intervention by the US has prevented what looked set to become a major monetary collapse.
Inconsistencies
The vote for Brexit in 2016 likely contained some of the same logic, and its leader, the former prime minister, swept away concerns regarding fiscal impacts with confident resolve to implement the “will of the people” in the face of the establishment’s horror.
Farage has so far committed few policies to paper except for proposals for mass deportations, that he later appeared to revise spontaneously. He aims to curb the central bank, possibly ditching its governor, the incumbent, with scepticism of a stodgy establishment as a central element of the populist package.
His tax and spending policies appear to be unsettled: concerned about facing criticism for planning reckless spending, he recently abandoned a promise to make large tax reductions. His second-in-command, the party chairman, stated they would concentrate instead on public spending cuts.
The opposition hopes this stance will enable it to portray Farage as planning to bring back fiscal tightening – an argument Rachel Reeves has emphasized often, contrasting it with her strategy of increasing public investment.
An economics professor says there are contradictions in Farage’s economic programme, as it stands. “Reform are bankrolled by affluent backers demanding tax cuts and reduced rules, but also talking a lot about the grievances of ordinary workers and the loss in manufacturing employment,” he explains. “There’s a tension here between rich backers seeking radical free-market policies, and this narrative of bringing back British jobs and reindustrialisation.”
Holding on to Power
In truth, the evidence suggests neither left nor right populists tend to fare well when confronting real-world challenges (although every populist leader promises distinct solutions).
A recent paper from a leading journal examined the outcomes of dozens of populist leaders, from 1900 to 2020. The study revealed typically, over the long term, gross domestic product per head is often 10% lower in nations run by populist leaders compared to comparable countries with more mainstream regimes.
“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually occur together under populist governments,” argue the researchers.
Another intriguing finding from the study, however, is that despite their economic costs, populist figures tend to be good at retaining office, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.
Put simply, it is not clear that even when their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction extends past everyday financial matters.
Yet back in Buenos Aires, whether Milei’s populist project collapses or is kept on life support by external aid, the Argentine people are already bearing a heavy price.
Laurie Jackson
A passionate writer and educator dedicated to helping others find their voice through creative expression and storytelling.
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