Can Populist-Led Administrations Inevitably Wreck the Economic System?

“Cambio, cambio.” Beneath the scorching heat, dozens of currency traders are offering US dollars along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a country long used to saving in the greenback.

“The best time for purchasing is currently,” says a arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”

Similar to her, economic experts from all backgrounds anticipate a depreciation of the national currency after the voting concludes. President Javier Milei has placed a limit on the peso to tame triple-digit price increases and currently it remains artificially high and reserves are exhausted, leaving the national economy sluggish as consumers opt for cheap imports.

Fertile Ground

Argentina is a very special case. The country has been repeatedly hit by debt defaults and economic crises and its voters have been susceptible for decades to left-leaning populist movements, in the form of the powerful Peronism, and currently Milei’s conservative populism.

Milei is a textbook populist: charismatic, iconoclastic, promising muscular policies to wrestle back control of the economy from the establishment for the benefit of the people.

These defining traits are shared by his ally to the north, and by the UK politician, who presents himself as a beer-drinking people’s champion despite being a public school-educated ex-finance professional.

Up until lately, Milei’s approach – involving extensive privatisations and severe budget reductions – had earned praise from the IMF for contributing to control inflation in check. The programme has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a dragon to be defeated, regardless of the consequences.

However investors began losing confidence in the government’s agenda in recent months following a poor performance in provincial elections and multiple graft allegations. Solely massive economic support by the US has averted what looked set to become a major currency crisis.

Contradictions

The vote for Brexit in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, swept away doubts regarding fiscal impacts with confident resolve to implement public demand despite the establishment’s horror.

Farage has so far committed few policies in writing aside from proposals for mass deportations, that he later seemed to adjust on the hoof. He wants to curb the central bank, possibly replacing its head, the incumbent, with distrust toward traditional institutions as a central element of the populist package.

His fiscal plans appear to be unsettled: concerned about being accused of planning reckless spending, he lately dropped a promise for large tax reductions. His second-in-command, Richard Tice, said they would concentrate instead on public spending cuts.

The opposition aims this stance will enable it to depict Farage as intending to bring back austerity – an argument the chancellor has made repeatedly, comparing it unfavorably to her strategy of boosting public investment.

An economics professor notes there are contradictions within the populist platform, such as it is. “Reform are bankrolled by affluent backers demanding tax cuts and reduced rules, but also talking a lot about the grievances of working people and the loss of industrial jobs,” he says. “There’s a tension here between rich backers who want Thatcherism on steroids, and this narrative of bringing back UK employment and reindustrialisation.”

Holding on to Power

Realistically, the evidence indicates neither left nor right populists often perform poorly when faced with practical difficulties (although each charismatic individual claims to offer something unique).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, after 15 years, GDP per capita is often 10% lower in nations run by populist leaders than in comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance typically occur together with populist rule,” argue the paper’s authors.

Another intriguing finding of the research, though, is that despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for a considerable time, compared with shorter tenures for their more moderate equivalents.

In other words, it remains uncertain that even when their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past mundane economics.

Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support by external aid, the Argentine people are already bearing significant costs.