Do Populist-Led Governments Inevitably Crash the Economic System?

“Exchange, exchange.” Under the scorching heat, scores of money changers are selling American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming ahead of the 26 October congressional elections in a country accustomed to holding the US dollar.

“The best time for purchasing is currently,” states a arbolito, declining to give her name. “[The dollar] dropped a little but it’s deceptive – it will rebound.”

Like her, economic experts across the spectrum expect a depreciation of the Argentine peso once the voting is over. The president has placed a cap on the peso to tame triple-digit price increases and currently it remains artificially high and reserves are depleted, leaving the national economy stagnant as consumers turn to low-cost foreign goods.

Fertile Ground

The nation represents a unique situation. The country has frequently been racked by sovereign defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, such as the influential Peronist movement, and currently Milei’s conservative populism.

Milei epitomizes populist leadership: captivating, iconoclastic, promising forceful measures to reclaim control of economic management from the establishment on behalf of the people.

These defining traits are shared by his ally in the United States, as well as the UK politician, who presents himself as a pint-swilling champion of the common man even though he is a privately educated former stockbroker.

Up until lately, the president’s strategy – including extensive privatisations and severe budget reductions – had won plaudits from international lenders for contributing to bring price rises in check. This plan has something in common with the policies of his political hero the former UK prime minister, 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 following a poor performance in provincial elections and a series of graft allegations. Solely large-scale economic support from abroad has prevented what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum in 2016 likely contained some of the same logic, and its leader, Boris Johnson, swept away doubts regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of the establishment’s horror.

The Reform leader has so far outlined limited plans to paper except for proposals for mass deportations, which he subsequently appeared to revise spontaneously. He aims to rein in the central bank, possibly ditching its governor, Andrew Bailey, with distrust 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 reckless spending, he lately abandoned a pledge to make large tax reductions. His Reform party deputy, Richard Tice, stated they would focus instead on public spending cuts.

Labour hopes this position will allow it to portray Farage as intending to bring back fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with her approach of increasing public investment.

An economics professor says there are contradictions in Farage’s economic programme, as it stands. “The party is funded by affluent backers calling for lower taxes and deregulation, but also talking a lot about the complaints of working people and the decline of industrial jobs,” he says. “There is a conflict here between wealthy supporters seeking radical free-market policies, and this story of restoring British jobs and reindustrialisation.”

Maintaining Control

In truth, the evidence indicates neither left nor right populists tend to fare well when confronting real-world challenges (although each charismatic individual promises distinct solutions).

A recent paper from a leading journal examined the outcomes of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, GDP per capita tends to be a tenth less in nations governed by populist leaders compared to comparable countries with more mainstream regimes.

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

A further interesting result from the study, however, is even with their negative impacts, populist figures tend to be good at retaining office, lasting on average eight years, compared with shorter tenures for their more moderate equivalents.

In other words, it is not clear that even when their policies fail, such leaders immediately pay the price at the ballot box. Similar to pledges made to “take back control”, their attraction reaches beyond everyday financial matters.

But back in Buenos Aires, whether the government’s agenda fails or is sustained by external aid, Argentina’s citizens are already bearing a heavy price.