Do Populist Administrations Always Crash the Economic System?

“Cambio, cambio.” Beneath the scorching heat, scores of money changers are offering US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a nation accustomed to holding the greenback.

“The best time to buy is now,” states one arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economists from all backgrounds anticipate a devaluation of the Argentine peso after the election concludes. The president has imposed a cap on the peso to tame soaring price increases and currently it remains artificially high and foreign reserves are exhausted, causing Argentina’s economy sluggish as consumers opt for low-cost foreign goods.

Fertile Ground

The nation is a very special case. The country has been repeatedly racked by debt defaults and economic crises and its voters have been receptive for decades to left-leaning populist movements, in the form of the influential Peronism, and currently the president’s conservative populism.

Milei epitomizes populist leadership: captivating, unconventional, promising forceful policies to reclaim command of economic management from the establishment for the benefit of ordinary citizens.

These key characteristics are shared by his ally to the north, as well as Nigel Farage, who styles himself as a pint-swilling people’s champion despite being a privately educated ex-finance professional.

Until recent months, Milei’s approach – including extensive privatisations and severe public spending cuts – had earned praise from the IMF for helping to control inflation under control. The programme shares similarities with the policies of his political hero the former UK prime minister, 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 lately after a poor performance in local polls and a series of corruption scandals. Solely large-scale economic support by the US has prevented what seemed destined to be a full-blown currency crisis.

Inconsistencies

The 2016 referendum in 2016 arguably had some of the same logic, and its figurehead, Boris Johnson, dismissed concerns regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of the establishment’s horror.

The Reform leader has so far outlined limited plans in writing aside from proposals for large-scale removals, that he later appeared to revise on the hoof. He wants to curb the Bank of England, possibly replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of the populist package.

His fiscal plans appear to be in flux: wary of being accused of proposing reckless spending, he lately dropped a pledge for large tax cuts. His second-in-command, the party chairman, stated they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will enable it to portray the populist as intending to bring back austerity – a point Rachel Reeves has emphasized often, comparing it unfavorably to her approach of increasing public investment.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, such as it is. “The party is funded by affluent backers calling for lower taxes and deregulation, but also talking a lot about the grievances of working people and the loss in manufacturing employment,” he says. “There is a conflict here between rich backers seeking radical free-market policies, and this story of restoring British jobs and industrial revival.”

Maintaining Control

In truth, the evidence suggests populists of any stripe tend to fare well when faced with practical difficulties (although each charismatic individual promises something unique).

Recent research from a leading journal analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, after 15 years, GDP per capita is often 10% lower in nations governed by populist rulers compared to similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually occur together under populist governments,” contend the researchers.

A further interesting result of the research, though, is that despite their economic costs, these leaders tend to be good at retaining office, remaining in power for a considerable time, compared with four for mainstream politicians.

In other words, it is not clear whether even if their policies fail, such leaders face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past mundane economics.

But back in Buenos Aires, regardless of if the government’s agenda fails or is sustained by external aid, Argentina’s citizens are already bearing significant costs.