Can Populist-Led Administrations Always Wreck the Economy?

“Exchange, exchange.” Under the blazing sun, scores of money changers are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the 26 October midterm elections in a nation accustomed to saving in the US dollar.

“The optimal moment for purchasing is currently,” says one arbolito, refusing to provide her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Like her, economists from all backgrounds anticipate a depreciation of the national currency after the election is over. The president has placed a cap on the peso to tame soaring price increases and currently it is artificially high and reserves are exhausted, leaving the national economy sluggish as consumers turn to cheap imports.

Fertile Ground

The nation represents a unique situation. The country has been repeatedly hit by sovereign defaults and economic crises and its voters have been susceptible for decades to left-leaning populist movements, such as the influential Peronist movement, and now the president’s rightwing version.

Milei epitomizes populist leadership: charismatic, iconoclastic, vowing forceful policies to wrestle back command of the economy from traditional elites on behalf of the people.

These key characteristics are also seen in his ally to the north, as well as Nigel Farage, who styles himself as a pint-swilling people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, Milei’s approach – involving extensive privatisations and severe budget reductions – had earned praise from the IMF for helping to bring price rises in check. The programme has something in common with that of his political hero Margaret Thatcher, who also saw rising prices as a dragon to be slain, no matter the cost.

However investors began losing confidence in the government’s agenda in recent months following a shaky result in provincial elections and a series of graft allegations. Only large-scale financial intervention by the US has averted what looked set to become a full-blown monetary collapse.

Contradictions

The 2016 referendum several years ago arguably had similar reasoning, and its leader, the former prime minister, dismissed concerns about economic detail with a bullish determination to enact public demand despite the establishment’s horror.

Farage to date outlined limited plans to paper except for proposals for mass deportations, that he later seemed to adjust spontaneously. He wants to rein in the Bank of England, possibly replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of the populist package.

His fiscal plans seem unsettled: wary of being accused of proposing reckless spending, he recently abandoned a pledge for large tax cuts. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.

Labour aims this stance will allow it to depict Farage as intending to bring back fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting government spending.

An economics professor says there are contradictions within the populist platform, as it stands. “The party are bankrolled by affluent backers calling for tax cuts and deregulation, yet also emphasizing the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict there between wealthy supporters who want Thatcherism on steroids, and this story of restoring British jobs and reindustrialisation.”

Maintaining Control

In truth, research indicates populists of any stripe often perform poorly when faced with practical difficulties (although each charismatic individual claims to offer distinct solutions).

Recent research in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, over more than a century. It found typically, over the long term, GDP per capita tends to be 10% lower in countries 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 paper’s authors.

Another intriguing finding of the research, though, is that despite their economic costs, populist figures are often effective at retaining office, lasting on average a considerable time, versus four for mainstream politicians.

In other words, it remains uncertain whether even if their plans crash, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

But returning to Buenos Aires, whether the government’s agenda collapses or is kept on life support by external aid, the Argentine people are already bearing significant costs.