Do Populist Administrations Always Crash the Economy?

“Dollars, dollars.” Under the scorching heat, dozens of currency traders are selling American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a country accustomed to holding the greenback.

“The optimal moment to buy is currently,” says a arbolito, declining to give her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Like her, economic experts from all backgrounds expect a depreciation of the Argentine peso after the election is over. President Javier Milei has placed a limit on the peso to control soaring inflation and now it remains overvalued and reserves are depleted, causing the national economy stagnant as consumers opt for low-cost foreign goods.

Ideal Conditions

The nation is a very special case. Argentina has been repeatedly hit by debt defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, such as the powerful Peronist movement, and now Milei’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, promising muscular measures to wrestle back control of economic management from the establishment for the benefit of ordinary citizens.

These defining traits are shared by his ally to the north, as well as the UK politician, who presents himself as a beer-drinking champion of the common man even though he is a public school-educated ex-finance professional.

Until recent months, Milei’s approach – involving widespread sell-offs and deep budget reductions – had won plaudits from the IMF for helping to bring price rises under control. This plan shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a monster to be defeated, regardless of the consequences.

But financial markets started to doubt in Milei’s radical project lately after a poor performance in local polls and multiple graft allegations. Only large-scale economic support from abroad has averted what seemed destined to be a full-blown monetary collapse.

Contradictions

The vote for Brexit several years ago arguably had similar reasoning, and its leader, Boris Johnson, dismissed doubts regarding fiscal impacts with a bullish determination to implement public demand in the face of elite opposition.

Farage to date committed few policies in writing except for a call for large-scale removals, that he later seemed to adjust on the hoof. He wants to rein in the Bank of England, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of the populist package.

His tax and spending policies seem unsettled: wary of facing criticism for planning a Liz Truss-style splurge, he recently dropped a pledge to make large tax cuts. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.

Labour aims this position will allow it to depict Farage as planning to bring back austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of boosting government spending.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, as it stands. “The party is funded by very wealthy people calling for lower taxes and reduced rules, but also talking a lot about the complaints of working people and the loss in manufacturing employment,” he says. “There’s a tension here between rich backers who want radical free-market policies, and this narrative of bringing back British jobs and industrial revival.”

Maintaining Control

In truth, research indicates neither left nor right populists tend to fare well when confronting practical difficulties (although each charismatic individual promises something unique).

Recent research in the American Economic Review analysed the performance of dozens of populist leaders, over more than a century. It found typically, over the long term, GDP per capita is often a tenth less in countries governed by populist leaders compared to comparable countries under conventional leadership.

“Financial decline, weakening economic fundamentals and the decay of governance typically occur together under populist governments,” contend the paper’s authors.

A further interesting result from the study, though, is even with their negative impacts, populist figures tend to be good at holding on to power, lasting on average a considerable time, compared with four for mainstream politicians.

In other words, it is not clear that even when their policies fail, such leaders immediately pay the price at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction reaches beyond everyday financial matters.

Yet returning to Buenos Aires, whether the government’s agenda collapses or is kept on life support by external aid, Argentina’s citizens have already paid a heavy price.