Do Populist-Led Administrations Inevitably Wreck the Economy?

“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are hawking American currency on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving ahead of the 26 October congressional elections in a nation long used to saving in the US dollar.

“The best time for purchasing is currently,” states one arbolito, declining to give her name. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”

Like her, economic experts across the spectrum expect a depreciation of the Argentine peso after the election concludes. President Javier Milei has placed a cap on the peso to tame soaring inflation and now it remains artificially high and foreign reserves are exhausted, causing the national economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. Argentina has frequently been hit by debt defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, in the form of the influential Peronism, and currently the president’s rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, promising forceful policies to reclaim command of economic management from traditional elites on behalf of the people.

These key characteristics are also seen in his ally to the north, as well as the UK politician, who presents himself as a pint-swilling champion of the common man despite being a public school-educated former stockbroker.

Until recent months, Milei’s approach – including extensive privatisations and deep public spending cuts – had won plaudits from the IMF for helping to bring inflation under control. This plan has something in common with the policies of Milei’s idol the former UK prime minister, who also saw rising prices as a dragon to be slain, regardless of the consequences.

But financial markets started to doubt in the government’s agenda in recent months following a poor performance in local polls and a series of graft allegations. Solely large-scale financial intervention from abroad has prevented what seemed destined to be a full-blown currency crisis.

Contradictions

The vote for Brexit in 2016 arguably had some of the same logic, and its figurehead, the former prime minister, dismissed concerns regarding fiscal impacts with a bullish determination to enact the “will of the people” despite elite opposition.

Farage to date committed few policies in writing except for proposals for mass deportations, which he subsequently appeared to revise spontaneously. He wants to rein in the Bank of England, possibly replacing its head, Andrew Bailey, with scepticism of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans seem unsettled: wary of facing criticism for proposing a Liz Truss-style splurge, he lately abandoned a promise for large tax reductions. His second-in-command, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

Labour aims this position will allow it to depict Farage as planning to reintroduce austerity – a point the chancellor has made repeatedly, comparing it unfavorably to her strategy of increasing public investment.

Jo Michell says there are contradictions within the populist platform, such as it is. “The party are bankrolled by affluent backers calling for tax cuts and reduced rules, but also talking a lot about the complaints of ordinary workers and the loss in manufacturing employment,” he says. “There’s a tension there among rich backers seeking radical free-market policies, and this story of bringing back UK employment and industrial revival.”

Maintaining Control

In truth, research suggests neither left nor right populists tend to fare well when confronting real-world challenges (though of course every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, after 15 years, GDP per capita is often 10% lower in nations run by populist leaders than in similar economies with more mainstream regimes.

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

Another intriguing finding of the research, however, is that despite their economic costs, these leaders are often effective at retaining office, remaining in power for eight years, compared with four for their more moderate equivalents.

In other words, it is not clear whether even if their policies fail, such leaders face immediate consequences at the ballot box. 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 fails or is kept on life support through foreign assistance, the Argentine people have already paid significant costs.