Do Populist Administrations Always Crash the Economic System?

“Dollars, dollars.” Under the blazing sun, scores of money changers are selling American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the October 26 midterm elections in a country long used to saving in the greenback.

“The best time for purchasing is now,” says one arbolito, refusing to provide her identity. “[The dollar] went down slightly but it is a fake-out – it will rebound.”

Similar to her, economists across the spectrum expect a devaluation of the national currency after the election is over. President Javier Milei has placed a limit on the currency to control soaring price increases and currently it is artificially high and foreign reserves are depleted, leaving the national economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been racked by debt defaults and economic crises and its voters have been receptive for decades to leftwing populism, such as the powerful Peronist movement, and now Milei’s conservative populism.

The president epitomizes populist leadership: charismatic, unconventional, promising forceful measures to wrestle back command of economic management from the establishment on behalf of the people.

These key characteristics are shared by his political partner in the United States, and by Nigel Farage, who styles himself as a pint-swilling champion of the common man even though he is a privately educated ex-finance professional.

Until recent months, Milei’s approach – involving extensive privatisations and severe public spending cuts – had earned praise from the IMF for contributing to control inflation in check. This plan shares similarities with that of his political hero the former UK prime minister, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

However financial markets began losing confidence in the government’s agenda lately following a poor performance in provincial elections and a series of corruption scandals. Solely massive financial intervention from abroad has averted what looked set to become a major currency crisis.

Contradictions

The vote for Brexit in 2016 likely contained similar reasoning, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to enact the “will of the people” in the face of elite opposition.

Farage to date outlined limited plans in writing except for proposals for large-scale removals, that he later seemed to adjust on the hoof. He aims to rein in the Bank of England, possibly ditching its governor, Andrew Bailey, with distrust toward traditional institutions as a central element of the populist package.

His tax and spending policies seem in flux: concerned about facing criticism for proposing a Liz Truss-style splurge, he recently abandoned a promise to make large tax cuts. His second-in-command, the party chairman, stated they would focus instead on public spending cuts.

The opposition aims this position will enable it to depict the populist as planning to bring back fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with her approach of boosting public investment.

Jo Michell says there are contradictions within the populist platform, such as it is. “The party is funded by affluent backers calling for lower taxes and deregulation, yet also emphasizing the complaints of ordinary workers and the loss of industrial jobs,” he says. “There is a conflict there among wealthy supporters seeking radical free-market policies, and this narrative of bringing back UK employment and industrial revival.”

Maintaining Control

In truth, the evidence suggests populists of any stripe often perform poorly when faced with real-world challenges (though of course every populist leader claims to offer something unique).

A recent paper from a leading journal analysed the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, after 15 years, GDP per capita is often a tenth less in countries governed by populist leaders than in similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually go hand in hand under populist governments,” argue the researchers.

Another intriguing finding of the research, though, is despite their economic costs, populist figures are often effective at holding on to power, remaining in power for eight years, compared with four for mainstream politicians.

In other words, it remains uncertain that even when their plans crash, populists immediately pay the price in elections. Similar to pledges made to regain sovereignty, their appeal reaches beyond mundane economics.

But returning to Buenos Aires, whether the government’s agenda collapses or is sustained through foreign assistance, Argentina’s citizens are already bearing significant costs.