Can Populist-Led Governments Inevitably Wreck the Economic System?

“Dollars, dollars.” Beneath the scorching heat, scores of money changers are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the October 26 midterm elections in a nation accustomed to saving in the greenback.

“The optimal moment for purchasing is currently,” says a arbolito, refusing to provide her name. “[The dollar] went down a little but it is a fake-out – it will rebound.”

Similar to her, economists across the spectrum expect a devaluation of the Argentine peso once the voting is over. The president has placed a limit on the peso to tame triple-digit price increases and currently it is artificially high and reserves are depleted, causing Argentina’s economy sluggish as buyers opt for cheap imports.

Fertile Ground

The nation represents a unique situation. The country has frequently been hit by sovereign defaults and economic crises and the electorate have been susceptible for decades to leftwing populism, such as the influential Peronism, and currently the president’s rightwing version.

Milei epitomizes populist leadership: captivating, iconoclastic, promising muscular policies to reclaim command of the economy from traditional elites on behalf of the people.

These defining traits are shared by his political partner to the north, as well as the UK politician, who presents himself as a pint-swilling champion of the common man even though he is a public school-educated former stockbroker.

Until recent months, Milei’s approach – involving extensive privatisations and deep budget reductions – had won plaudits from the IMF for contributing to control price rises in check. This plan shares similarities with that of Milei’s idol the former UK prime minister, who similarly viewed inflation as a monster to be slain, regardless of the consequences.

However investors began losing confidence in Milei’s radical project lately following a shaky result in provincial elections and multiple graft allegations. Solely large-scale economic support by the US has prevented what looked set to become a major currency crisis.

Inconsistencies

The vote for Brexit in 2016 likely contained some of the same logic, and its leader, the former prime minister, swept away doubts about economic detail with a bullish determination to implement the “will of the people” in the face of elite opposition.

Farage to date committed few policies in writing except for a call for large-scale removals, which he subsequently appeared to revise spontaneously. He wants to curb the Bank of England, possibly replacing its head, Andrew Bailey, with scepticism of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies appear to be in flux: concerned about being accused of planning reckless spending, he lately abandoned a promise for large tax reductions. His Reform party deputy, Richard Tice, said they would focus instead on public spending cuts.

Labour aims this position will allow it to portray Farage as planning to reintroduce fiscal tightening – a point the chancellor has made repeatedly, comparing it unfavorably to her approach of boosting government spending.

Jo Michell says there exist inconsistencies within the populist platform, as it stands. “The party are bankrolled by very wealthy people calling for tax cuts and deregulation, but also talking a lot about the grievances of working people and the decline of industrial jobs,” he says. “There is a conflict there between wealthy supporters who want Thatcherism on steroids, and this narrative of bringing back UK employment and industrial revival.”

Maintaining Control

In truth, the evidence suggests neither left nor right populists tend to fare well when confronting practical difficulties (though of course every populist leader promises 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, after 15 years, GDP per capita is often 10% lower in nations governed by populist rulers than in comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand with populist rule,” contend the researchers.

Another intriguing finding of the research, though, is that even with their negative impacts, populist figures are often effective at holding on to power, remaining in power for a considerable time, compared with shorter tenures for mainstream politicians.

In other words, it remains uncertain that even when their plans crash, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond mundane economics.

Yet back in Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, Argentina’s citizens have already paid significant costs.