Do Populist-Led Administrations Always Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, dozens of money changers are selling US dollars on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a nation long used to saving in the greenback.

“The best time to buy is now,” states one arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economists from all backgrounds expect a depreciation of the national currency once the voting is over. President Javier Milei has placed a cap on the currency to control triple-digit price increases and now it remains artificially high and reserves are exhausted, leaving Argentina’s economy sluggish as consumers turn to low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. Argentina has been repeatedly hit by sovereign defaults and economic crises and the electorate have been susceptible for decades to leftwing populism, in the form of the powerful Peronist movement, and now the president’s rightwing version.

The president epitomizes populist leadership: captivating, unconventional, vowing muscular policies to wrestle back control of economic management from the establishment for the benefit of the people.

These key characteristics are shared by his political partner in the United States, and by the UK politician, who styles himself as a beer-drinking people’s champion despite being a public school-educated former stockbroker.

Until recent months, the president’s strategy – including widespread sell-offs and deep budget reductions – had won plaudits from the IMF for contributing to control price rises in check. This plan shares similarities with that of his political hero Margaret Thatcher, who also saw inflation as a dragon to be slain, regardless of the consequences.

However investors started to doubt in the government’s agenda in recent months after a shaky result in provincial elections and multiple corruption scandals. Only large-scale financial intervention by the US has averted what looked set to become a major currency crisis.

Contradictions

The 2016 referendum in 2016 likely contained similar reasoning, and its figurehead, Boris Johnson, swept away concerns regarding fiscal impacts with a bullish determination to enact public demand in the face of elite opposition.

The Reform leader has so far committed few policies in writing aside from a call for mass deportations, which he subsequently seemed to adjust spontaneously. He aims to curb the Bank of England, perhaps even ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment as a central element of the populist package.

His tax and spending policies seem unsettled: concerned about facing criticism for planning reckless spending, he recently dropped a pledge to make significant tax reductions. His Reform party deputy, Richard Tice, said they would concentrate instead on public spending cuts.

Labour aims this position will allow it to depict the populist as planning to bring back fiscal tightening – a point the chancellor has made repeatedly, comparing it unfavorably to her strategy of boosting government spending.

Jo Michell says there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by very wealthy people calling for lower taxes and reduced rules, yet also talking a lot about the complaints of working people and the decline in manufacturing employment,” he explains. “There is a conflict here between rich backers seeking Thatcherism on steroids, and this narrative of bringing back UK employment and industrial revival.”

Holding on to Power

Realistically, research suggests populists of any stripe tend to fare well when confronting real-world challenges (though of course every populist leader claims to offer something unique).

A recent paper from a leading journal examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, gross domestic product per head is often 10% lower in countries governed by populist leaders than in similar economies with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically occur together under populist governments,” argue the paper’s authors.

Another intriguing finding from the study, though, is that despite their economic costs, populist figures tend to be good at retaining office, remaining in power for a considerable time, versus shorter tenures for mainstream politicians.

Put simply, it remains uncertain that even when their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is sustained by external aid, Argentina’s citizens are already bearing a heavy price.