Do Populist-Led Administrations Inevitably Wreck the Economic System?

“Exchange, exchange.” Beneath the scorching heat, scores of money changers are hawking US dollars on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a nation accustomed to saving in the greenback.

“The optimal moment for purchasing is now,” states a arbolito, declining to give her identity. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Like her, economists across the spectrum anticipate a devaluation of the national currency once the voting concludes. President Javier Milei has imposed a limit on the peso to tame triple-digit price increases and now it is artificially high and foreign reserves are depleted, leaving Argentina’s economy sluggish as consumers turn to low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has been repeatedly racked by sovereign defaults and economic crises and the electorate have been susceptible over the years to leftwing populism, such as the powerful Peronism, and now Milei’s rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, vowing muscular policies to reclaim control of the economy from traditional elites for the benefit of the people.

These defining traits are shared by his political partner in the United States, as well as the UK politician, who styles himself as a beer-drinking people’s champion despite being a public school-educated former stockbroker.

Until recent months, the president’s strategy – including widespread sell-offs and severe public spending cuts – had won plaudits from international lenders for contributing to control price rises in check. The programme shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, no matter the cost.

But financial markets began losing confidence in the government’s agenda lately following a shaky result in local polls and multiple graft allegations. Only massive economic support by the US has averted what seemed destined to be a major monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, Boris Johnson, swept away doubts about economic detail with confident resolve to implement the “will of the people” in the face of the establishment’s horror.

The Reform leader has so far committed few policies in writing aside from a call for mass deportations, that he later appeared to revise spontaneously. He aims to curb the central bank, perhaps even ditching its governor, Andrew Bailey, with scepticism toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies appear to be in flux: concerned about facing criticism for proposing reckless spending, he recently dropped a pledge for large tax cuts. His second-in-command, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will allow it to depict the populist as planning to reintroduce austerity – an argument Rachel Reeves has made repeatedly, contrasting it with her approach of increasing public investment.

Jo Michell says there are contradictions in Farage’s economic programme, as it stands. “The party is funded by affluent backers demanding tax cuts and deregulation, yet also talking a lot about the complaints of working people and the loss of industrial jobs,” he says. “There is a conflict there among rich backers who want radical free-market policies, and this story of restoring UK employment and reindustrialisation.”

Maintaining Control

In truth, research indicates populists of any stripe often perform poorly when faced with practical difficulties (although every populist leader promises something unique).

Recent research in the American Economic Review examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, gross domestic product per head tends to be a tenth less in nations run by populist leaders compared to comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance usually occur together under populist governments,” argue the researchers.

Another intriguing finding of the research, however, is despite their economic costs, these leaders are often effective at holding on to power, lasting on average a considerable time, versus four for their more moderate equivalents.

Put simply, it remains uncertain that even when their policies fail, populists face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

Yet returning to Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support by external aid, Argentina’s citizens are already bearing significant costs.