Can Populist-Led Governments Inevitably Wreck the Economic System?

“Exchange, exchange.” Under the scorching heat, scores of currency traders are hawking US dollars on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the October 26 congressional elections in a country accustomed to holding the US dollar.

“The best time to buy is now,” says one arbolito, refusing to provide her identity. “[The dollar] went down slightly but it is a fake-out – it will rebound.”

Similar to her, economic experts from all backgrounds anticipate a devaluation of the Argentine peso once the voting concludes. President Javier Milei has imposed a limit on the peso to tame triple-digit inflation and now it remains artificially high and foreign reserves are exhausted, leaving Argentina’s economy stagnant as consumers opt for cheap imports.

Ideal Conditions

Argentina is a very special case. Argentina has been repeatedly hit by debt defaults and economic crises and the electorate have been susceptible over the years to left-leaning populist movements, in the form of the powerful Peronist movement, and now the president’s conservative populism.

Milei is a textbook populist: captivating, unconventional, promising forceful measures to reclaim control of economic management from traditional elites on behalf of ordinary citizens.

These key characteristics are shared by his ally to the north, and by Nigel Farage, who styles himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, the president’s strategy – including widespread sell-offs and deep budget reductions – had earned praise from international lenders for contributing to bring price rises under control. This plan shares similarities with that of his political hero the former UK prime minister, who also saw inflation as a monster to be defeated, regardless of the consequences.

But investors began losing confidence in the government’s agenda in recent months after a shaky result in local polls and a series of graft allegations. Solely massive economic support by the US has averted what looked set to become a major currency crisis.

Contradictions

The 2016 referendum in 2016 likely contained some of the same logic, and its leader, the former prime minister, swept away concerns regarding fiscal impacts with a bullish determination to enact the “will of the people” despite elite opposition.

Farage to date committed few policies in writing aside from proposals for large-scale removals, that he later seemed to adjust spontaneously. He wants to curb the central bank, perhaps even ditching its governor, Andrew Bailey, with scepticism toward traditional institutions as a central element of the populist package.

His tax and spending policies appear to be unsettled: concerned about facing criticism for proposing a Liz Truss-style splurge, he recently dropped a pledge for large tax cuts. His second-in-command, the party chairman, said they would focus instead on reductions in government expenditure.

The opposition aims this position will allow it to depict Farage as intending to bring back austerity – a point the chancellor has made repeatedly, comparing it unfavorably to her approach of boosting public investment.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, such as it is. “The party is funded by very wealthy people demanding lower taxes and deregulation, but also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict there between rich backers who want radical free-market policies, and this story of restoring British jobs and reindustrialisation.”

Holding on to Power

In truth, research indicates populists of any stripe tend to fare well when faced with real-world challenges (although every populist leader claims to offer something unique).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, over the long term, GDP per capita tends to be a tenth less in countries run by populist rulers compared to similar economies with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” contend the paper’s authors.

A further interesting result of the research, though, is even with their negative impacts, populist figures tend to be good at retaining office, lasting on average a considerable time, versus four for mainstream politicians.

In other words, it is not clear that even when their policies fail, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond everyday financial matters.

But back in Buenos Aires, regardless of if Milei’s populist project fails or is kept on life support by external aid, the Argentine people have already paid a heavy price.