Do Populist-Led Administrations Always Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, dozens of currency traders are hawking American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the October 26 midterm elections in a country accustomed to holding the US dollar.

“The best time to buy is now,” states one arbolito, declining to give her name. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Like her, economists from all backgrounds expect a devaluation of the Argentine peso after the voting is over. President Javier Milei has placed a cap on the peso to control triple-digit price increases and currently it is overvalued and foreign reserves are exhausted, causing Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. The country has been repeatedly racked by debt defaults and financial turmoil and the electorate have been receptive over the years to leftwing populism, in the form of the influential Peronist movement, and now Milei’s conservative populism.

The president is a textbook populist: charismatic, iconoclastic, promising forceful policies to wrestle back control of the economy from the establishment on behalf of the people.

These defining traits are also seen in his ally to the north, and by Nigel Farage, who presents himself as a beer-drinking champion of the common man even though he is a privately educated former stockbroker.

Until recent months, the president’s strategy – including widespread sell-offs and deep budget reductions – had earned praise from the IMF for helping to control inflation in check. The programme shares similarities with that of Milei’s idol Margaret Thatcher, who also saw inflation as a monster to be defeated, no matter the cost.

But investors began losing confidence in Milei’s radical project lately after a shaky result in provincial elections and a series of corruption scandals. Solely large-scale economic support from abroad has prevented what seemed destined to be a major currency crisis.

Inconsistencies

The 2016 referendum several years ago likely contained some of the same logic, and its figurehead, Boris Johnson, dismissed doubts about economic detail with confident resolve to enact public demand despite elite opposition.

Farage has so far outlined limited plans in writing aside from proposals for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to curb the Bank of England, possibly ditching its governor, Andrew Bailey, with distrust toward traditional institutions being a key part of the populist package.

His tax and spending policies appear to be in flux: wary of facing criticism for proposing a Liz Truss-style splurge, he recently abandoned a promise to make significant tax reductions. His second-in-command, Richard Tice, stated they would concentrate instead on public spending cuts.

Labour aims this position will enable it to portray the populist as planning to reintroduce fiscal tightening – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of increasing government spending.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “The party are bankrolled by affluent backers demanding tax cuts and deregulation, yet also talking a lot about the grievances of ordinary workers and the decline in manufacturing employment,” he explains. “There is a conflict there between rich backers seeking radical free-market policies, and this story of restoring British jobs and industrial revival.”

Maintaining Control

In truth, research suggests neither left nor right populists tend to fare well when faced with real-world challenges (although every populist leader promises distinct solutions).

A recent paper in the American Economic Review examined the performance of 51 populist presidents and prime ministers, over more than a century. It found that on average, over the long term, gross domestic product per head is often 10% lower in countries run by populist rulers compared to similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually occur together with populist rule,” contend the researchers.

A further interesting result from the study, however, is that even with their negative impacts, populist figures tend to be good at retaining office, remaining in power for eight years, versus shorter tenures for their more moderate equivalents.

Put simply, it is not clear that even when their policies fail, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their appeal extends past everyday financial matters.

But returning to Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people are already bearing a heavy price.