Can Populist Governments Inevitably Crash the Economy?

“Cambio, cambio.” Beneath the blazing sun, scores of money changers are hawking American currency along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the October 26 congressional elections in a country accustomed to saving in the greenback.

“The optimal moment to buy is now,” says a arbolito, declining to give her name. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Like her, economists from all backgrounds expect a depreciation of the Argentine peso once the election concludes. The president has placed a limit on the peso to control triple-digit inflation and now it remains overvalued and foreign reserves are exhausted, leaving Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. Argentina has been repeatedly hit by debt defaults and economic crises and its voters have been susceptible over the years to left-leaning populist movements, such as the powerful Peronism, and now Milei’s conservative populism.

The president is a textbook populist: charismatic, iconoclastic, vowing forceful policies to wrestle back control of the economy from traditional elites on behalf of the people.

These key characteristics are also seen in his political partner to the north, as well as the UK politician, who presents himself as a beer-drinking people’s champion despite being a public school-educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and severe public spending cuts – had won plaudits from international lenders for helping to bring price rises under control. The programme shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed rising prices as a monster to be defeated, regardless of the consequences.

However financial markets started to doubt in the government’s agenda in recent months after a shaky result in provincial elections and a series of graft allegations. Only large-scale financial intervention from abroad has averted what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum in 2016 likely contained similar reasoning, and its figurehead, Boris Johnson, swept away concerns regarding fiscal impacts with confident resolve to implement the “will of the people” despite elite opposition.

The Reform leader to date committed few policies to paper aside from a call for large-scale removals, that he later appeared to revise on the hoof. He wants to curb the Bank of England, possibly ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans appear to be in flux: wary of being accused of planning reckless spending, he lately dropped a pledge for significant tax cuts. His second-in-command, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will enable it to depict the populist as planning to reintroduce austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her approach of boosting public investment.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people demanding tax cuts and reduced rules, yet also talking a lot about the grievances of working people and the decline of industrial jobs,” he says. “There is a conflict here among rich backers who want Thatcherism on steroids, and this narrative of restoring UK employment and reindustrialisation.”

Holding on to Power

In truth, the evidence suggests neither left nor right populists tend to fare well when faced with real-world challenges (although every populist leader promises distinct solutions).

Recent research from a leading journal examined the performance of dozens of populist leaders, from 1900 to 2020. The study revealed typically, after 15 years, gross domestic product per head tends to be a tenth less in countries run by populist leaders compared to similar economies under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually occur together under populist governments,” argue the researchers.

A further interesting result of the research, though, is even with their negative impacts, these leaders are often effective at holding on to power, lasting on average a considerable time, versus shorter tenures for their more moderate equivalents.

Put simply, it is not clear whether even if their plans crash, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction reaches beyond mundane economics.

Yet returning to Buenos Aires, regardless of if the government’s agenda fails or is sustained through foreign assistance, the Argentine people have already paid significant costs.