Do Populist-Led Administrations Inevitably Crash the Economic System?

“Cambio, cambio.” Under the scorching heat, scores of currency traders are offering US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the 26 October midterm elections in a country accustomed to saving in the greenback.

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

Similar to her, economists across the spectrum expect a depreciation of the national currency once the election concludes. President Javier Milei has placed a cap on the peso to control triple-digit inflation and now it is artificially high and foreign reserves are exhausted, causing the national economy stagnant as buyers opt for cheap imports.

Fertile Ground

Argentina represents a unique situation. Argentina has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been susceptible over the years to leftwing populism, such as the powerful Peronist movement, and now Milei’s conservative populism.

Milei is a textbook populist: captivating, unconventional, vowing muscular policies to reclaim command of economic management from traditional elites on behalf of the people.

These defining traits are shared by his political partner in the United States, as well as Nigel Farage, who presents himself as a beer-drinking champion of the common man even though he is a privately educated former stockbroker.

Up until lately, Milei’s approach – involving extensive privatisations and severe public spending cuts – had won plaudits from international lenders for contributing to bring inflation in check. This plan has something in common with that of Milei’s idol Margaret Thatcher, who also saw rising prices as a dragon to be defeated, no matter the cost.

However investors began losing confidence in the government’s agenda lately after a shaky result in provincial elections and a series of corruption scandals. Only massive financial intervention from abroad has averted what seemed destined to be a full-blown currency crisis.

Inconsistencies

The vote for Brexit in 2016 likely contained some of the same logic, and its figurehead, Boris Johnson, dismissed doubts regarding fiscal impacts with a bullish determination to enact public demand in the face of elite opposition.

The Reform leader to date outlined limited plans to paper except for proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He wants to curb the central bank, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of populist rhetoric.

His tax and spending policies seem in flux: wary of facing criticism for planning a Liz Truss-style splurge, he recently dropped a promise for large tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on reductions in government expenditure.

Labour hopes this position will enable it to portray the populist as planning to bring back austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting government spending.

Jo Michell notes there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by affluent backers demanding lower taxes and deregulation, yet also talking a lot about the complaints of working people and the loss in manufacturing employment,” he explains. “There’s a tension there among rich backers seeking radical free-market policies, and this story of bringing back UK employment and industrial revival.”

Holding on to Power

Realistically, the evidence indicates neither left nor right populists tend to fare well when confronting real-world challenges (though of course every populist leader claims to offer something unique).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, GDP per capita is often 10% lower in nations governed by populist rulers compared to similar economies with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually go hand in hand with populist rule,” contend the paper’s authors.

Another intriguing finding of the research, however, is that even with their negative impacts, populist figures tend to be good at retaining office, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.

Put simply, it remains uncertain whether even if their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond everyday financial matters.

But back in Buenos Aires, regardless of if the government’s agenda fails or is kept on life support through foreign assistance, the Argentine people have already paid significant costs.