Do Populist-Led Administrations Always Wreck the Economy?

“Dollars, dollars.” Under the scorching heat, dozens of currency traders are selling American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the October 26 midterm elections in a country long used to saving in the greenback.

“The best time for purchasing is currently,” states a arbolito, declining to give her identity. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Similar to her, economists across the spectrum expect a devaluation of the Argentine peso after the voting concludes. The president has placed a cap on the currency to tame soaring inflation and now it remains artificially high and reserves are exhausted, leaving the national economy sluggish as consumers opt for cheap imports.

Ideal Conditions

The nation represents a unique situation. The country has been repeatedly hit by sovereign defaults and economic crises and the electorate have been receptive for decades to left-leaning populist movements, such as the influential Peronist movement, and now Milei’s conservative populism.

Milei epitomizes populist leadership: captivating, unconventional, 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 Nigel Farage, who styles himself as a pint-swilling people’s champion despite being a privately educated former stockbroker.

Until recent months, Milei’s approach – including extensive privatisations and deep budget reductions – had earned praise from international lenders for contributing to bring price rises in check. This plan has something in common with that of his political hero Margaret Thatcher, who similarly viewed rising prices as a monster to be defeated, no matter the cost.

But investors began losing confidence in Milei’s radical project in recent months after a poor performance in provincial elections and multiple graft allegations. Only massive financial intervention by the US has averted what looked set to become a major monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its figurehead, Boris Johnson, dismissed doubts about economic detail with confident resolve to implement public demand in the face of the establishment’s horror.

The Reform leader has so far committed few policies in writing except for a call for large-scale removals, which he subsequently appeared to revise spontaneously. He aims to rein in the Bank of England, perhaps even replacing its head, the incumbent, with distrust toward traditional institutions being a key part of the populist package.

His tax and spending policies seem unsettled: wary of facing criticism for planning reckless spending, he lately dropped a promise for significant tax cuts. His second-in-command, Richard Tice, stated they would focus instead on reductions in government expenditure.

Labour hopes this position will allow it to portray Farage as planning to bring back fiscal tightening – a point the chancellor has emphasized often, contrasting it with her approach of increasing public investment.

Jo Michell says there are contradictions within the populist platform, such as it is. “Reform is funded by affluent backers calling for lower taxes and reduced rules, but also emphasizing the grievances of working people and the decline of industrial jobs,” he explains. “There’s a tension there among rich backers seeking Thatcherism on steroids, and this narrative of restoring UK employment and industrial revival.”

Maintaining Control

In truth, the evidence suggests populists of any stripe often perform poorly when faced with practical difficulties (although every populist leader claims to offer distinct solutions).

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 leaders compared to comparable countries with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand with populist rule,” argue the paper’s authors.

A further interesting result of the research, though, is that even with their negative impacts, populist figures are often effective at retaining office, remaining in power for eight years, compared with four for their more moderate equivalents.

In other words, it is not clear that even when their plans crash, such leaders immediately pay the price at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal extends past mundane economics.

But returning to Buenos Aires, regardless of if the government’s agenda fails or is sustained by external aid, the Argentine people have already paid a heavy price.