Do Populist-Led Administrations Inevitably Crash the Economy?

“Cambio, cambio.” Beneath the blazing sun, scores of money changers are offering American currency along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the October 26 congressional elections in a country accustomed to saving in the US dollar.

“The best time to buy is currently,” states one arbolito, declining to give her identity. “[The dollar] dropped slightly but it’s deceptive – it’ll rise again.”

Like her, economic experts across the spectrum expect a devaluation of the Argentine peso after the election concludes. The president has placed a limit on the currency to control soaring inflation and currently it remains artificially high and reserves are depleted, leaving Argentina’s economy sluggish as consumers opt for cheap imports.

Ideal Conditions

The nation represents a unique situation. Argentina has been repeatedly hit by debt defaults and economic crises and its voters have been receptive for decades to left-leaning populist movements, such as the powerful Peronism, and now the president’s rightwing version.

Milei epitomizes populist leadership: charismatic, iconoclastic, promising muscular policies to wrestle back control of the economy from traditional elites for the benefit of ordinary citizens.

These key characteristics are also seen in his ally to the north, as well as Nigel Farage, who presents himself as a pint-swilling people’s champion even though he is a privately educated former stockbroker.

Until recent months, the president’s strategy – including extensive privatisations and severe budget reductions – had won plaudits from the IMF for helping to bring price rises in check. This plan has something in common with the policies of his political hero Margaret Thatcher, who also saw rising prices as a dragon to be defeated, no matter the cost.

But financial markets started to doubt in Milei’s radical project lately following a poor performance in provincial elections and multiple corruption scandals. Solely large-scale economic support by the US has averted what looked set to become a major currency crisis.

Inconsistencies

The 2016 referendum several years ago arguably had some of the same logic, and its leader, Boris Johnson, swept away concerns about economic detail with a bullish determination to implement the “will of the people” in the face of the establishment’s horror.

The Reform leader to date committed few policies to paper aside from a call for large-scale removals, that he later seemed to adjust on the hoof. He wants to curb the Bank of England, possibly ditching its governor, Andrew Bailey, with distrust of a stodgy establishment as a central element of the populist package.

His fiscal plans appear to be unsettled: concerned about facing criticism for proposing a Liz Truss-style splurge, he recently dropped a promise to make significant tax cuts. His Reform party deputy, Richard Tice, said they would focus instead on public spending cuts.

The opposition hopes this stance will allow it to portray Farage as intending to reintroduce fiscal tightening – a point the chancellor has made repeatedly, comparing it unfavorably to her strategy of boosting public investment.

An economics professor says there are contradictions within the populist platform, as it stands. “Reform is funded by very wealthy people demanding tax cuts and deregulation, but also emphasizing the complaints of ordinary workers and the decline in manufacturing employment,” he explains. “There’s a tension there between wealthy supporters who want Thatcherism on steroids, and this story of restoring UK employment and industrial revival.”

Maintaining Control

In truth, research indicates neither left nor right populists tend to fare well when faced with real-world challenges (although each charismatic individual claims to offer something unique).

A recent paper from a leading journal analysed the outcomes of dozens of populist leaders, over more than a century. The study revealed typically, over the long term, gross domestic product per head is often a tenth less in countries governed by populist leaders than in similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually occur together under populist governments,” contend the researchers.

Another intriguing finding from the study, though, is that despite their economic costs, populist figures are often effective at retaining office, lasting on average a considerable time, compared with four for mainstream politicians.

In other words, it is not clear that even when their plans crash, populists face immediate consequences in elections. Similar to pledges made to “take back control”, their attraction reaches beyond everyday financial matters.

Yet returning to Buenos Aires, regardless of if Milei’s populist project fails or is sustained by external aid, the Argentine people are already bearing a heavy price.