Can Populist-Led Governments Inevitably Wreck the Economic System?

“Cambio, cambio.” Under the blazing sun, scores of currency traders are offering American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the October 26 congressional elections in a country long used to saving in the greenback.

“The best time for purchasing is now,” says a arbolito, declining to give her identity. “[The dollar] went down a little but it is a fake-out – it’ll rise again.”

Like her, economists from all backgrounds anticipate a depreciation of the national currency once the voting is over. President Javier Milei has placed a limit on the peso to control triple-digit price increases and now it is overvalued and reserves are depleted, causing the national economy stagnant as buyers opt for low-cost foreign goods.

Fertile Ground

Argentina is a very special case. Argentina 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 currently the president’s rightwing version.

Milei epitomizes populist leadership: charismatic, iconoclastic, vowing forceful measures to wrestle back control of economic management from traditional elites on behalf of the people.

These key characteristics are shared by his ally to the north, as well as the UK politician, who presents himself as a beer-drinking people’s champion despite being a privately educated ex-finance professional.

Up until lately, the president’s strategy – including widespread sell-offs and severe public spending cuts – had earned praise from international lenders for helping to control inflation in check. This plan shares similarities with that of his political hero Margaret Thatcher, who also saw rising prices as a dragon to be slain, regardless of the consequences.

However investors began losing confidence in Milei’s radical project in recent months after a poor performance in provincial elections and multiple graft allegations. Solely massive economic support by the US has averted what looked set to become a full-blown currency crisis.

Contradictions

The vote for Brexit in 2016 arguably had similar reasoning, and its figurehead, Boris Johnson, dismissed concerns about economic detail with a bullish determination to enact the “will of the people” in the face of the establishment’s horror.

Farage has so far outlined limited plans to paper except for proposals for large-scale removals, which he subsequently appeared to revise spontaneously. He aims to rein in the Bank of England, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of the populist package.

His tax and spending policies seem in flux: wary of being accused of proposing reckless spending, he lately dropped a promise to make significant tax reductions. His second-in-command, the party chairman, said they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will allow it to portray Farage as planning to reintroduce austerity – a point Rachel Reeves has emphasized often, contrasting it with her strategy of boosting public investment.

An economics professor notes there exist inconsistencies in Farage’s economic programme, such as it is. “The party are bankrolled by affluent backers demanding lower taxes and reduced rules, but also emphasizing the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension here between wealthy supporters seeking radical free-market policies, and this narrative of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, research indicates populists of any stripe often perform poorly when confronting real-world challenges (although each charismatic individual claims to offer distinct solutions).

Recent research in the American Economic Review examined the outcomes of dozens of populist leaders, over more than a century. It found that on average, over the long term, gross domestic product per head tends to be 10% lower in nations run by populist leaders than in comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance usually go hand in hand under populist governments,” argue the researchers.

Another intriguing finding from the study, however, is even with their negative impacts, these leaders are often effective at retaining office, remaining in power for a considerable time, versus four for their more moderate equivalents.

In other words, it remains uncertain that even when their policies fail, such leaders 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 collapses or is kept on life support by external aid, Argentina’s citizens have already paid a heavy price.