Do Populist Governments Always Wreck the Economy?
“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are hawking American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the 26 October midterm elections in a nation long used to saving in the greenback.
“The best time to buy is currently,” states one arbolito, refusing to provide her identity. “[The dollar] dropped a little but it’s deceptive – it will rebound.”
Similar to her, economists across the spectrum expect a depreciation of the national currency after the voting is over. President Javier Milei has imposed a cap on the currency to control triple-digit inflation and currently it is artificially high and foreign reserves are depleted, leaving the national economy sluggish as buyers opt for cheap imports.
Ideal Conditions
Argentina is a very special case. Argentina has been repeatedly hit by debt defaults and economic crises and its voters have been susceptible for decades to left-leaning populist movements, in the form of the powerful Peronist movement, and currently Milei’s rightwing version.
Milei epitomizes populist leadership: captivating, iconoclastic, vowing forceful measures to wrestle back control of economic management from traditional elites on behalf of ordinary citizens.
These defining traits are shared by his political partner in the United States, and by Nigel Farage, who styles himself as a pint-swilling people’s champion despite being a public school-educated ex-finance professional.
Until recent months, Milei’s approach – including extensive privatisations and deep budget reductions – had earned praise from international lenders for contributing to bring price rises in check. The programme shares similarities with the policies of Milei’s idol the former UK prime minister, who also saw rising prices as a dragon to be slain, no matter the cost.
But investors started to doubt in the government’s agenda in recent months following a poor performance in local polls and multiple graft allegations. Solely massive economic support by the US has averted what looked set to become a major currency crisis.
Inconsistencies
The 2016 referendum in 2016 likely contained similar reasoning, and its leader, the former prime minister, dismissed doubts 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 committed few policies in writing aside from a call for mass deportations, which he subsequently appeared to revise on the hoof. He aims to curb the Bank of England, perhaps even replacing its head, Andrew Bailey, with scepticism of a stodgy establishment being a key part of populist rhetoric.
His fiscal plans seem in flux: concerned about being accused of planning reckless spending, he lately abandoned a pledge to make significant tax reductions. His second-in-command, Richard Tice, said they would concentrate instead on reductions in government expenditure.
Labour hopes this position will enable it to portray Farage as planning to reintroduce fiscal tightening – an argument the chancellor has emphasized often, contrasting it with her strategy of increasing government spending.
An economics professor notes there are contradictions in Farage’s economic programme, such as it is. “The party are bankrolled by very wealthy people demanding lower taxes and deregulation, but also emphasizing the grievances of working people and the loss in manufacturing employment,” he explains. “There’s a tension here between rich backers who want Thatcherism on steroids, and this narrative of bringing back British jobs and industrial revival.”
Maintaining Control
In truth, research suggests neither left nor right populists often perform poorly when faced with practical difficulties (though of course each charismatic individual promises distinct solutions).
A recent paper from a leading journal examined the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, after 15 years, GDP per capita is often a tenth less in nations governed by populist rulers compared to comparable countries under conventional leadership.
“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually occur together with populist rule,” argue the paper’s authors.
A further interesting result from the study, though, is despite their economic costs, populist figures are often effective at retaining office, lasting on average eight years, compared with four for mainstream politicians.
In other words, it is not clear that even when their plans crash, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction extends past everyday financial matters.
But back in Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, Argentina’s citizens have already paid a heavy price.
