Do Populist Administrations Inevitably Crash the Economic System?

“Dollars, dollars.” Under the scorching heat, dozens of money changers are hawking US dollars on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the 26 October midterm elections in a nation accustomed to saving in the US dollar.

“The best time for purchasing is currently,” states one arbolito, refusing to provide her identity. “[The dollar] went down a little but it is a fake-out – it’ll rise again.”

Like her, economists from all backgrounds anticipate a depreciation of the Argentine peso after the election is over. The president has placed a limit on the peso to control soaring inflation and now it remains overvalued and foreign reserves are depleted, causing the national economy stagnant as buyers turn to low-cost foreign goods.

Ideal Conditions

Argentina is a very special case. Argentina has frequently been hit by debt defaults and financial turmoil and the electorate have been susceptible over the years to leftwing populism, in the form of the powerful Peronist movement, and now Milei’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, vowing muscular measures to reclaim control of economic management from the establishment on behalf of ordinary citizens.

These key characteristics are also seen in his political partner in the United States, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man even though he is a public school-educated former stockbroker.

Up until lately, Milei’s approach – including widespread sell-offs and severe public spending cuts – had earned praise from the IMF for helping to bring inflation in check. The programme has something in common with that of his political hero Margaret Thatcher, who similarly viewed inflation as a dragon to be defeated, regardless of the consequences.

However investors started to doubt in the government’s agenda in recent months after a shaky result in local polls and a series of graft allegations. Solely large-scale economic support by the US has averted what looked set to become a major monetary collapse.

Inconsistencies

The vote for Brexit in 2016 likely contained some of the same logic, and its leader, Boris Johnson, dismissed doubts about economic detail with confident resolve to implement public demand in the face of elite opposition.

Farage to date outlined limited plans to paper aside from a call for large-scale removals, that he later appeared to revise spontaneously. He wants to rein in the central bank, possibly replacing its head, Andrew Bailey, with distrust of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies appear to be in flux: wary of being accused of proposing reckless spending, he lately abandoned a pledge for significant tax cuts. His second-in-command, Richard Tice, said they would focus instead on reductions in government expenditure.

The opposition aims this position will allow it to depict the populist as intending to reintroduce austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of increasing government spending.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “The party is funded by affluent backers demanding tax cuts and deregulation, but also emphasizing the grievances of working people and the decline in manufacturing employment,” he explains. “There is a conflict here among rich backers who want radical free-market policies, and this narrative of restoring UK employment and industrial revival.”

Maintaining Control

In truth, research indicates neither left nor right populists often perform poorly when faced with practical difficulties (though of course each charismatic individual claims to offer something unique).

Recent research from a leading journal examined the outcomes of 51 populist presidents and prime ministers, over more than a century. It found typically, after 15 years, GDP per capita tends to be 10% lower in nations run by populist rulers compared to comparable countries with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically go hand in hand with populist rule,” argue the paper’s authors.

Another intriguing finding from the study, though, is that despite their economic costs, these leaders tend to be good at retaining office, remaining in power for eight years, versus four for mainstream politicians.

Put simply, it remains uncertain whether even if their policies fail, populists 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 Milei’s populist project collapses or is sustained by external aid, Argentina’s citizens are already bearing a heavy price.