Can Populist Administrations Inevitably Wreck the Economy?

“Exchange, exchange.” Under the scorching heat, scores of currency traders are offering American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the 26 October midterm elections in a country accustomed to holding the greenback.

“The optimal moment for purchasing is now,” states a arbolito, refusing to provide her identity. “[The dollar] went down slightly but it is a fake-out – it will rebound.”

Like her, economic experts from all backgrounds expect a depreciation of the Argentine peso after the election is over. President Javier Milei has imposed a cap on the peso to control triple-digit inflation and now it remains overvalued and foreign reserves are exhausted, leaving the national economy stagnant as consumers opt for cheap imports.

Fertile Ground

Argentina is a very special case. The country has frequently been racked by debt defaults and economic crises and its voters have been receptive over the years to leftwing populism, such as the powerful Peronist movement, and currently Milei’s rightwing version.

Milei epitomizes populist leadership: charismatic, unconventional, vowing muscular measures to wrestle back control of the economy from traditional elites for the benefit of the people.

These defining traits are shared by his political partner to the north, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man even though he is a privately educated former stockbroker.

Until recent months, the president’s strategy – involving widespread sell-offs and severe budget reductions – had won plaudits from international lenders for contributing to control inflation under control. The programme shares similarities with that of his political hero the former UK prime minister, who similarly viewed rising prices as a monster to be defeated, regardless of the consequences.

However investors began losing confidence in the government’s agenda lately following a shaky result in local polls and a series of graft allegations. Only massive economic support from abroad has averted what looked set to become a major currency crisis.

Contradictions

The 2016 referendum several years ago arguably had some of the same logic, and its leader, the former prime minister, dismissed doubts regarding fiscal impacts with a bullish determination to enact public demand despite elite opposition.

Farage to date committed few policies to paper except for proposals for mass deportations, that he later seemed to adjust spontaneously. He wants to curb the central bank, perhaps even ditching its governor, the incumbent, with scepticism toward traditional institutions being a key part of the populist package.

His fiscal plans seem in flux: wary of facing criticism for proposing a Liz Truss-style splurge, he lately dropped a pledge for significant tax cuts. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.

The opposition hopes this stance will enable it to depict the populist as planning to bring back fiscal tightening – an argument Rachel Reeves has emphasized often, comparing it unfavorably to her strategy of boosting government spending.

Jo Michell notes 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, but also talking a lot about the complaints of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict here between wealthy supporters who want radical free-market policies, and this story of restoring British jobs and industrial revival.”

Maintaining Control

In truth, the evidence suggests populists of any stripe tend to fare well when faced with real-world challenges (though of course every populist leader claims to offer something unique).

Recent research in the American Economic Review analysed the outcomes of dozens of populist leaders, over more than a century. It found typically, after 15 years, GDP per capita is often a tenth less in nations governed by populist rulers compared to comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually go hand in hand under populist governments,” argue the paper’s authors.

A further interesting result from the study, however, is despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear 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.

But back in Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support by external aid, the Argentine people are already bearing a heavy price.