Can Populist Administrations Inevitably Wreck the Economic System?

“Cambio, cambio.” Beneath the scorching heat, scores of money changers are offering American currency on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October congressional elections in a country accustomed to holding the US dollar.

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

Similar to her, economists from all backgrounds anticipate a depreciation of the national currency after the voting concludes. The president has imposed a cap on the peso to tame soaring price increases and now it remains overvalued and reserves are depleted, leaving Argentina’s economy stagnant as buyers turn to low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. The country has frequently been hit by sovereign defaults and financial turmoil and its voters have been susceptible over the years to leftwing populism, such as the influential Peronist movement, and currently the president’s rightwing version.

Milei epitomizes populist leadership: charismatic, iconoclastic, vowing muscular measures to wrestle back control of economic management from the establishment for the benefit of ordinary citizens.

These defining traits are also seen in his ally in the United States, and by Nigel Farage, who styles himself as a pint-swilling people’s champion even though he is a privately educated ex-finance professional.

Until recent months, Milei’s approach – including extensive privatisations and severe public spending cuts – had earned praise from the IMF for contributing to bring price rises in check. This plan has something in common with that of his political hero the former UK prime minister, who similarly viewed inflation as a monster to be defeated, no matter the cost.

But financial markets started to doubt in Milei’s radical project in recent months after a poor performance in local polls and a series of graft allegations. Solely large-scale financial intervention by the US has prevented what seemed destined to be a full-blown currency crisis.

Inconsistencies

The 2016 referendum in 2016 arguably had some of the same logic, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to implement the “will of the people” despite elite opposition.

Farage to date committed few policies in writing except for proposals for mass deportations, that he later appeared to revise on the hoof. He wants to rein in the Bank of England, perhaps even replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of the populist package.

His tax and spending policies appear to be unsettled: wary of facing criticism for proposing reckless spending, he lately abandoned a promise for large tax cuts. His second-in-command, the party chairman, said they would concentrate instead on reductions in government expenditure.

Labour hopes this position will enable it to portray Farage as intending to bring back fiscal tightening – a point the chancellor has emphasized often, comparing it unfavorably to her approach of increasing government spending.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for lower taxes and reduced rules, but also emphasizing the complaints of ordinary workers and the decline in manufacturing employment,” he explains. “There is a conflict here among wealthy supporters who want radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”

Holding on to Power

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

A recent paper from a leading journal examined the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, after 15 years, gross domestic product per head tends to be a tenth less in countries governed by populist rulers compared to comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance usually occur together with populist rule,” argue the researchers.

Another intriguing finding of the research, however, is despite their economic costs, these leaders tend to be good at retaining office, remaining in power for eight years, versus shorter tenures for mainstream politicians.

In other words, it remains uncertain whether even if their policies fail, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their attraction reaches beyond mundane economics.

Yet returning to Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support by external aid, Argentina’s citizens are already bearing significant costs.