Do Populist Governments Always Wreck the Economy?
“Cambio, cambio.” Under the scorching heat, scores of money changers are selling American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a country accustomed to holding the US dollar.
“The best time to buy 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.”
Like her, economists from all backgrounds anticipate a devaluation of the national currency once the voting is over. The president has placed a limit on the currency to control triple-digit price increases and now it remains artificially high and reserves are depleted, causing Argentina’s economy sluggish as buyers turn to low-cost foreign goods.
Fertile Ground
The nation is a very special case. Argentina has frequently been racked by debt defaults and economic crises and its voters have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronism, and currently Milei’s conservative populism.
Milei is a textbook populist: charismatic, iconoclastic, promising muscular policies to wrestle back command of economic management 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 people’s champion despite being a privately educated former stockbroker.
Until recent months, Milei’s approach – involving widespread sell-offs and deep budget reductions – had earned praise from international lenders for contributing to control inflation under control. The programme has something in common with that of his political hero Margaret Thatcher, who also saw inflation as a dragon to be defeated, no matter the cost.
However financial markets began losing confidence in Milei’s radical project in recent months after a shaky result in provincial elections and a series of corruption scandals. Solely large-scale economic support from abroad has averted what seemed destined to be a major monetary collapse.
Inconsistencies
The 2016 referendum several years ago likely contained similar reasoning, and its leader, the former prime minister, swept away concerns about economic detail with a bullish determination to enact the “will of the people” in the face of the establishment’s horror.
The Reform leader has so far committed few policies in writing except for a call for large-scale removals, which he subsequently appeared to revise on the hoof. He aims to rein in the Bank of England, possibly replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of populist rhetoric.
His fiscal plans seem unsettled: concerned about being accused of proposing reckless spending, he lately dropped a pledge for significant tax cuts. His Reform party deputy, the party chairman, stated they would focus instead on public spending cuts.
The opposition aims this position will enable it to portray the populist as planning to bring back fiscal tightening – an argument the chancellor has emphasized often, contrasting it with her approach of boosting government spending.
An economics professor says there are contradictions within the populist platform, such as it is. “Reform is funded by very wealthy people demanding lower taxes and reduced rules, yet also emphasizing the grievances of working people and the loss in manufacturing employment,” he says. “There’s a tension there among wealthy supporters seeking Thatcherism on steroids, and this story of bringing back British jobs and industrial revival.”
Maintaining Control
Realistically, research indicates populists of any stripe often perform poorly when faced with practical difficulties (although every populist leader promises distinct solutions).
A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, GDP per capita tends to be 10% lower in nations run by populist rulers than in comparable countries with more mainstream regimes.
“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically go hand in hand with populist rule,” argue the researchers.
Another intriguing finding from the study, though, is that even with their negative impacts, these leaders tend to be good at holding on to power, remaining in power for eight years, versus shorter tenures for their more moderate equivalents.
Put simply, it remains uncertain whether even if their plans crash, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction extends past mundane economics.
Yet returning to Buenos Aires, whether Milei’s populist project collapses or is sustained by external aid, the Argentine people are already bearing a heavy price.