Do Populist Administrations Inevitably Wreck the Economic System?

“Exchange, exchange.” Beneath the blazing sun, dozens of currency traders are hawking US dollars along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a nation long used to holding the US dollar.

“The optimal moment to buy is currently,” states a arbolito, refusing to provide her identity. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Similar to her, economic experts from all backgrounds anticipate a depreciation of the national currency after the election is over. The president has placed a cap on the currency to control triple-digit inflation and currently it is artificially high and reserves are depleted, causing Argentina’s economy sluggish as buyers opt for cheap imports.

Ideal Conditions

The nation is a very special case. The country has frequently been racked by sovereign defaults and financial turmoil and the electorate have been receptive over the years to left-leaning populist movements, in the form of the influential Peronism, and now Milei’s conservative populism.

Milei epitomizes populist leadership: charismatic, iconoclastic, vowing muscular measures to wrestle back command of economic management from the establishment for the benefit of the people.

These key characteristics are also seen in his political partner in the United States, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man even though he is a public school-educated former stockbroker.

Up until lately, Milei’s approach – including extensive privatisations and severe public spending cuts – had earned praise from the IMF for contributing to bring price rises under control. The programme shares similarities with the policies of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a dragon to be slain, regardless of the consequences.

However investors started to doubt in the government’s agenda in recent months after a shaky result in local polls and a series of graft allegations. Only massive economic support by the US has averted what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its leader, Boris Johnson, 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.

Farage has so far committed few policies in writing except for a call for large-scale removals, that he later 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 as a central element of the populist package.

His fiscal plans appear to be in flux: wary of facing criticism for planning reckless spending, he lately dropped a promise to make significant tax cuts. His Reform party deputy, Richard Tice, stated they would concentrate instead on public spending cuts.

Labour hopes this position will allow it to portray Farage as planning to bring back austerity – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting public investment.

An economics professor notes there exist inconsistencies within the populist platform, such as it is. “Reform is funded by affluent backers demanding lower taxes and deregulation, but also talking a lot about the grievances of working people and the decline in manufacturing employment,” he explains. “There is a conflict there between 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 confronting real-world challenges (though of course each charismatic individual claims to offer something unique).

Recent research in the American Economic Review analysed the performance of dozens of populist leaders, over more than a century. It found that on average, after 15 years, GDP per capita tends to be 10% lower in countries run by populist rulers than in similar economies with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand under populist governments,” contend the researchers.

A further interesting result from the study, though, is that despite their economic costs, these leaders are often effective at retaining office, remaining in power for a considerable time, versus four for their more moderate equivalents.

Put simply, it remains uncertain that even when their policies fail, populists immediately pay the price in elections. Similar to pledges made to regain sovereignty, their appeal reaches beyond mundane economics.

Yet back in Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support through foreign assistance, Argentina’s citizens are already bearing a heavy price.