Do Populist Governments Always Wreck the Economy?

“Cambio, cambio.” Under the blazing sun, dozens of currency traders are hawking US dollars on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the October 26 midterm elections in a nation accustomed to saving in the US dollar.

“The best time to buy 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 across the spectrum anticipate a depreciation of the Argentine peso after the voting is over. President Javier Milei has imposed a cap on the peso to control soaring inflation and now it remains artificially high and reserves are exhausted, causing Argentina’s economy sluggish as consumers turn to cheap imports.

Ideal Conditions

Argentina represents a unique situation. Argentina has been repeatedly racked by sovereign defaults and financial turmoil and the electorate have been receptive for decades to left-leaning populist movements, in the form of the influential Peronist movement, and now Milei’s conservative populism.

Milei epitomizes populist leadership: captivating, unconventional, promising muscular policies to wrestle back control of economic management from the establishment on behalf of the people.

These key characteristics are also seen in his political partner to the north, and by the UK politician, who styles himself as a beer-drinking champion of the common man despite being a public school-educated ex-finance professional.

Until recent months, Milei’s approach – including widespread sell-offs and severe budget reductions – had won plaudits from the IMF for helping to control price rises under control. The programme shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed inflation as a monster to be defeated, no matter the cost.

But investors began losing confidence in the government’s agenda in recent months after a shaky result in local polls and multiple corruption scandals. Solely large-scale economic support by the US has prevented what seemed destined to be a full-blown monetary collapse.

Contradictions

The 2016 referendum in 2016 arguably had similar reasoning, and its leader, the former prime minister, dismissed doubts regarding fiscal impacts with confident resolve to enact 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 large-scale removals, that he later seemed to adjust spontaneously. He wants to rein in the Bank of England, possibly replacing its head, the incumbent, with distrust of a stodgy establishment as a central element of the populist package.

His fiscal plans appear to be unsettled: concerned about facing criticism for proposing reckless spending, he recently dropped a pledge for significant tax reductions. His second-in-command, the party chairman, stated they would concentrate instead on public spending cuts.

Labour hopes this stance will enable it to depict Farage as intending to reintroduce fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with her strategy of boosting government spending.

Jo Michell notes there are contradictions in Farage’s economic programme, as it stands. “Reform is funded by very wealthy people demanding lower taxes and reduced rules, but also emphasizing the complaints of working people and the loss in manufacturing employment,” he explains. “There is a conflict there between wealthy supporters who want radical free-market policies, and this story of bringing back British jobs and reindustrialisation.”

Maintaining Control

In truth, the evidence suggests populists of any stripe tend to fare well when confronting real-world challenges (though of course each charismatic individual promises something unique).

Recent research in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, over more than a century. It found typically, after 15 years, GDP per capita is often 10% lower in nations governed by populist rulers compared to comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually go hand in hand under populist governments,” argue the paper’s authors.

Another intriguing finding of the research, though, is that despite their economic costs, populist figures tend to be good at holding on to power, remaining in power for eight years, compared with shorter tenures for mainstream politicians.

Put simply, it remains uncertain that even when their policies fail, such leaders immediately pay the price in elections. Similar to pledges made to regain sovereignty, their attraction extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.