Can Populist Administrations Inevitably Wreck the Economy?

“Dollars, dollars.” Beneath the scorching heat, dozens of money changers are offering US dollars along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the 26 October congressional elections in a country accustomed to holding the US dollar.

“The optimal moment to buy is now,” says one arbolito, declining to give her name. “[The dollar] dropped slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists across the spectrum expect a depreciation of the national currency after the election concludes. President Javier Milei has imposed a limit on the currency to tame soaring price increases and now it is artificially high and reserves are depleted, causing Argentina’s economy stagnant as consumers opt for cheap imports.

Fertile Ground

The nation represents a unique situation. Argentina has frequently been hit by sovereign defaults and financial turmoil and its voters have been susceptible over the years to leftwing populism, such as the influential Peronist movement, and now Milei’s conservative populism.

Milei epitomizes populist leadership: captivating, iconoclastic, promising muscular policies to wrestle back command of the economy from traditional elites on behalf of ordinary citizens.

These defining traits are shared by his political partner in the United States, as well as Nigel Farage, who presents himself as a pint-swilling people’s champion despite being a public school-educated former stockbroker.

Up until lately, the president’s strategy – involving extensive privatisations and severe public spending cuts – had won plaudits from international lenders for helping to bring inflation under control. This plan shares similarities with that of his political hero Margaret Thatcher, who similarly viewed rising prices as a dragon to be slain, no matter the cost.

But investors began losing confidence in Milei’s radical project lately after a poor performance in provincial elections and multiple graft allegations. Only large-scale financial intervention by the US has averted what looked set to become a full-blown monetary collapse.

Inconsistencies

The 2016 referendum several years ago arguably had similar reasoning, and its figurehead, the former prime minister, swept away doubts regarding fiscal impacts with a bullish determination to enact the “will of the people” in the face of elite opposition.

Farage has so far outlined limited plans in writing except for proposals for mass deportations, that he later appeared to revise spontaneously. He wants to curb the Bank of England, possibly ditching its governor, the incumbent, with distrust of a stodgy establishment being a key part of the populist package.

His tax and spending policies seem unsettled: concerned about being accused of planning a Liz Truss-style splurge, he lately abandoned a pledge to make significant tax reductions. His second-in-command, the party chairman, said they would concentrate instead on public spending cuts.

Labour hopes this position will enable it to portray the populist as intending to reintroduce fiscal tightening – an argument the chancellor has emphasized often, contrasting it with her strategy of increasing government spending.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “Reform is funded by very wealthy people calling for lower taxes and reduced rules, but also emphasizing the grievances of working people and the loss in manufacturing employment,” he says. “There is a conflict there between rich backers seeking radical free-market policies, and this narrative of restoring British jobs and industrial revival.”

Holding on to Power

In truth, research indicates populists of any stripe often perform poorly when confronting practical difficulties (although each charismatic individual claims to offer something unique).

A recent paper from a leading journal examined the outcomes of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, after 15 years, GDP per capita tends to be 10% lower in countries governed by populist leaders than in comparable countries with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions 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, these leaders are often effective at retaining office, lasting on average a considerable time, compared with four for their more moderate equivalents.

Put simply, it is not clear that even when their policies fail, such leaders face immediate consequences in elections. Similar to pledges made to regain sovereignty, their appeal extends past mundane economics.

Yet returning to Buenos Aires, whether Milei’s populist project collapses or is sustained by external aid, the Argentine people are already bearing significant costs.