Can Populist Governments Inevitably Wreck the Economy?
“Cambio, cambio.” Under the scorching heat, dozens of money changers are selling US dollars along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the 26 October congressional elections in a country long used to holding the greenback.
“The optimal moment to buy is now,” says a arbolito, declining to give her name. “[The dollar] went down slightly but it’s deceptive – it will rebound.”
Similar to her, economic experts from all backgrounds anticipate a depreciation of the Argentine peso after the election is over. President Javier Milei has imposed a cap on the peso to control triple-digit price increases and currently it remains overvalued and reserves are exhausted, causing Argentina’s economy sluggish as consumers opt for cheap imports.
Ideal Conditions
Argentina represents a unique situation. The country has been repeatedly racked by sovereign defaults and economic crises and the electorate have been susceptible over the years to leftwing populism, in the form of the influential Peronism, and now the president’s rightwing version.
Milei is a textbook populist: charismatic, iconoclastic, vowing muscular policies to wrestle back control of the economy from the establishment for the benefit of ordinary citizens.
These key characteristics are also seen in his political partner in the United States, and by the UK politician, who styles himself as a beer-drinking champion of the common man even though he is a public school-educated ex-finance professional.
Up until lately, Milei’s approach – involving extensive privatisations and deep budget reductions – had won plaudits from international lenders for helping to bring price rises in check. The programme shares similarities with the policies of his political hero Margaret Thatcher, who also saw inflation as a monster to be slain, no matter the cost.
But financial markets began losing confidence in Milei’s radical project in recent months following a poor performance in provincial elections and multiple graft allegations. Solely large-scale financial intervention from abroad has prevented what looked set to become a full-blown currency crisis.
Inconsistencies
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 public demand despite the establishment’s horror.
Farage to date outlined limited plans in writing except for proposals for mass deportations, that he later appeared to revise spontaneously. He wants to curb the central bank, possibly ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment as a central element of the populist package.
His fiscal plans appear to be unsettled: wary of being accused of proposing reckless spending, he recently abandoned a pledge to make significant tax cuts. His Reform party deputy, Richard Tice, stated they would concentrate instead on reductions in government expenditure.
The opposition aims this stance will allow it to portray Farage as planning to reintroduce fiscal tightening – a point the chancellor has made repeatedly, comparing it unfavorably to her strategy of increasing public investment.
Jo Michell says there exist inconsistencies within the populist platform, such as it is. “Reform are bankrolled by very wealthy people demanding lower taxes and deregulation, but also talking a lot about the grievances of working people and the loss in manufacturing employment,” he explains. “There’s a tension there between rich backers who want Thatcherism on steroids, and this narrative of restoring British jobs and industrial revival.”
Maintaining Control
Realistically, the evidence suggests neither left nor right populists tend to fare well when confronting practical difficulties (though of course each charismatic individual claims to offer distinct solutions).
Recent research from a leading journal examined the outcomes of dozens of populist leaders, over more than a century. The study revealed that on average, over the long term, gross domestic product per head is often 10% lower in nations run by populist leaders compared to similar economies with more mainstream regimes.
“Financial decline, decreasing macroeconomic stability and the decay of governance usually go hand in hand under populist governments,” argue the paper’s authors.
A further interesting result from the study, though, is that even with their negative impacts, populist figures tend to be good at retaining office, lasting on average eight years, compared with shorter tenures for mainstream politicians.
Put simply, it is not clear that even when their policies fail, such leaders immediately pay the price in elections. 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 collapses or is sustained through foreign assistance, Argentina’s citizens have already paid a heavy price.
