Can Populist-Led Governments Inevitably Wreck the Economic System?

“Exchange, exchange.” Under the blazing sun, scores of money changers are selling US dollars on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming ahead of the 26 October congressional elections in a country long used to holding the greenback.

“The optimal moment to buy is now,” states one arbolito, declining to give her name. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”

Like her, economic experts from all backgrounds expect a depreciation of the national currency once the election concludes. The president has placed a cap on the peso to control soaring price increases and now it is overvalued and foreign reserves are exhausted, causing the national economy stagnant as buyers opt for cheap imports.

Ideal Conditions

The nation represents a unique situation. The country has been repeatedly hit by sovereign defaults and financial turmoil and its voters have been susceptible for decades to leftwing populism, in the form of the influential Peronist movement, and now Milei’s rightwing version.

Milei epitomizes populist leadership: captivating, unconventional, vowing forceful measures to reclaim control of economic management from the establishment on behalf of ordinary citizens.

These defining traits are also seen in his ally to the north, as well as the UK politician, who presents himself as a pint-swilling champion of the common man despite being a privately educated former stockbroker.

Up until lately, Milei’s approach – including extensive privatisations and severe budget reductions – had earned praise from international lenders for helping to control price rises in check. The programme has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a dragon to be slain, no matter the cost.

However investors began losing confidence in the government’s agenda in recent months after a shaky result in local polls and multiple corruption scandals. Only massive economic support by the US has averted what seemed destined to be a full-blown monetary collapse.

Contradictions

The vote for Brexit in 2016 arguably had some of the same logic, and its figurehead, Boris Johnson, swept away concerns about economic detail with a bullish determination to enact public demand in the face of the establishment’s horror.

The Reform leader to date committed few policies to paper except for a call for mass deportations, that he later seemed to adjust on the hoof. He wants to curb the central bank, possibly replacing its head, Andrew Bailey, with distrust of a stodgy establishment as a central element of the populist package.

His tax and spending policies appear to be in flux: concerned about being accused of planning reckless spending, he recently dropped a pledge to make large tax cuts. His Reform party deputy, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

The opposition hopes this position will enable it to depict the populist as intending to reintroduce fiscal tightening – a point Rachel Reeves has made repeatedly, contrasting it with her approach of increasing government spending.

An economics professor says there are contradictions within the populist platform, such as it is. “The party is funded by affluent backers demanding tax cuts and reduced rules, yet also talking a lot about the complaints of ordinary workers and the decline of industrial jobs,” he explains. “There is a conflict here among rich backers seeking radical free-market policies, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

Realistically, research indicates neither left nor right populists often perform poorly when faced with practical difficulties (though of course each charismatic individual promises something unique).

A recent paper from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, after 15 years, GDP per capita is often a tenth less in countries run by populist leaders than in comparable countries with more mainstream regimes.

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

Another intriguing finding from the study, however, 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 four for their more moderate equivalents.

Put simply, it remains uncertain whether even if 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.

Yet back in Buenos Aires, whether Milei’s populist project fails or is sustained through foreign assistance, Argentina’s citizens are already bearing a heavy price.