Do Populist-Led Administrations Inevitably Crash the Economy?

“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are selling American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the 26 October midterm elections in a nation accustomed to saving in the US dollar.

“The best time for purchasing is currently,” states a arbolito, declining to give her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Like her, economic experts from all backgrounds expect a devaluation of the Argentine peso after the voting is over. President Javier Milei has imposed a limit on the currency to control soaring inflation and now it is overvalued and foreign reserves are depleted, leaving the national economy sluggish as consumers opt for low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. The country has frequently been racked by sovereign defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, in the form of the influential Peronism, and now Milei’s rightwing version.

The president is a textbook populist: captivating, unconventional, promising forceful policies to wrestle back command of the economy from traditional elites for the benefit of ordinary citizens.

These defining traits are also seen in his ally in the United States, as well as the UK politician, who styles himself as a beer-drinking champion of the common man despite being a privately educated former stockbroker.

Until recent months, Milei’s approach – including extensive privatisations and deep public spending cuts – had won plaudits from the IMF for helping to bring inflation under control. This plan has something in common with that of his political hero the former UK prime minister, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.

However financial markets started to doubt in the government’s agenda lately following a shaky result in provincial elections and a series of corruption scandals. Solely massive economic support by the US has averted what seemed destined to be a major monetary collapse.

Contradictions

The vote for Brexit several years ago likely contained similar reasoning, and its figurehead, Boris Johnson, swept away concerns regarding fiscal impacts with confident resolve to enact public demand despite elite opposition.

Farage to date committed few policies to paper except for a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to rein in the Bank of England, possibly replacing its head, Andrew Bailey, with distrust toward traditional institutions being a key part of populist rhetoric.

His fiscal plans seem in flux: wary of being accused of proposing a Liz Truss-style splurge, he lately dropped a pledge for large tax cuts. His second-in-command, Richard Tice, stated they would focus instead on reductions in government expenditure.

The opposition aims this stance will enable it to depict the populist as planning to bring back austerity – a point the chancellor has made repeatedly, comparing it unfavorably to her strategy of increasing public investment.

Jo Michell says there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by very wealthy people demanding lower taxes and reduced rules, but also emphasizing the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict here among rich backers seeking Thatcherism on steroids, and this story of restoring British jobs and reindustrialisation.”

Maintaining Control

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

A recent paper in the American Economic Review analysed the performance of dozens of populist leaders, over more than a century. It found that on average, after 15 years, GDP per capita is often 10% lower in countries run by populist leaders than in comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually occur together with populist rule,” contend the researchers.

Another intriguing finding of the research, though, is that despite their economic costs, populist figures tend to be good at holding on to power, remaining in power for eight years, versus four for their more moderate equivalents.

Put simply, it remains uncertain whether even if their plans crash, populists immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past mundane economics.

Yet back in Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, the Argentine people have already paid a heavy price.