Can Populist-Led Governments Inevitably Crash the Economy?

“Dollars, dollars.” Under the scorching heat, dozens of money changers are selling US dollars on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the October 26 congressional elections in a country long used to holding the greenback.

“The optimal moment to buy is now,” states a arbolito, refusing to provide her name. “[The dollar] went down a little but it is a fake-out – it will rebound.”

Like her, economic experts from all backgrounds expect a depreciation of the Argentine peso after the voting is over. The president has placed a cap on the peso to control triple-digit price increases and now it remains artificially high and foreign reserves are exhausted, causing the national economy sluggish as buyers opt for cheap imports.

Ideal Conditions

The nation represents a unique situation. The country has been repeatedly racked by debt defaults and economic crises and the electorate have been receptive for decades to left-leaning populist movements, in the form of the powerful Peronism, and currently Milei’s rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, promising muscular policies to reclaim command of economic management from the establishment on behalf of the people.

These defining traits are also seen in his ally to the north, as well as the UK politician, who styles himself as a beer-drinking people’s champion despite being a privately educated former stockbroker.

Until recent months, Milei’s approach – including extensive privatisations and severe public spending cuts – had won plaudits from international lenders for contributing to bring price rises in check. This plan has something in common with the policies of Milei’s idol the former UK prime minister, who also saw inflation as a dragon to be defeated, regardless of the consequences.

But investors began losing confidence in the government’s agenda in recent months after a poor performance in provincial elections and multiple corruption scandals. Solely large-scale financial intervention by the US has averted what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum in 2016 arguably had some of the same logic, and its leader, Boris Johnson, swept away concerns regarding fiscal impacts with a bullish determination to enact the “will of the people” in the face of the establishment’s horror.

The Reform leader to date outlined limited plans in writing except for a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to curb the Bank of England, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies appear to be in flux: concerned about being accused of proposing a Liz Truss-style splurge, he lately abandoned a pledge to make large tax reductions. His second-in-command, the party chairman, stated they would concentrate instead on reductions in government expenditure.

Labour aims this position will allow it to depict the populist as intending to bring back fiscal tightening – a point Rachel Reeves has made repeatedly, contrasting it with her approach of increasing government spending.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “The party is funded by affluent backers demanding tax cuts and deregulation, yet also talking a lot about the grievances of ordinary workers and the decline in manufacturing employment,” he says. “There’s a tension there among rich backers who want radical free-market policies, and this story of restoring British jobs and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well when confronting practical difficulties (although every populist leader promises something unique).

Recent research in the American Economic Review analysed the outcomes of dozens of populist leaders, from 1900 to 2020. It found typically, over the long term, gross domestic product per head tends to be a tenth less in nations run by populist leaders compared to similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically occur together with populist rule,” argue the paper’s authors.

Another intriguing finding of the research, though, is that despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for eight years, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear that even when their policies fail, such leaders face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond everyday financial matters.

Yet returning to Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, the Argentine people are already bearing significant costs.