Do Populist Administrations Inevitably Wreck the Economic System?

“Cambio, cambio.” Under the blazing sun, dozens of currency traders are hawking American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a country accustomed to holding the greenback.

“The optimal moment to buy is now,” states one arbolito, declining to give her identity. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economic experts from all backgrounds anticipate a depreciation of the Argentine peso after the election concludes. The president has imposed a limit on the currency to control triple-digit inflation and now it remains overvalued and foreign reserves are depleted, leaving the national economy stagnant as consumers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. The country has frequently been racked by debt defaults and financial turmoil and the electorate have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronist movement, and now the president’s conservative populism.

The president is a textbook populist: charismatic, iconoclastic, vowing muscular policies to wrestle back command 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 the UK politician, who presents himself as a pint-swilling people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, the president’s strategy – involving widespread sell-offs and deep public spending cuts – had earned praise from the IMF for helping to control price rises in check. This plan shares similarities with that of his political hero Margaret Thatcher, who also saw inflation as a monster to be slain, regardless of the consequences.

But investors began losing confidence in Milei’s radical project lately following a poor performance in provincial elections and a series of corruption scandals. Solely massive economic support by the US has averted what looked set to become a major monetary collapse.

Inconsistencies

The vote for Brexit several years ago likely contained some of the same logic, and its leader, Boris Johnson, dismissed doubts about economic detail with a bullish determination to implement public demand in the face of elite opposition.

The Reform leader has so far committed few policies to paper aside from proposals for large-scale removals, that he later appeared to revise on the hoof. He aims to curb the Bank of England, perhaps even ditching its governor, the incumbent, with scepticism toward traditional institutions being a key part of the populist package.

His fiscal plans seem unsettled: wary of being accused of proposing reckless spending, he lately dropped a pledge to make significant tax cuts. His second-in-command, the party chairman, stated they would concentrate instead on reductions in government expenditure.

Labour hopes this position will allow it to depict the populist as planning to reintroduce fiscal tightening – an argument the chancellor has made repeatedly, contrasting it with her approach of increasing public investment.

Jo Michell says there exist inconsistencies within the populist platform, as it stands. “The party are bankrolled by affluent backers demanding lower taxes and reduced rules, yet also talking a lot about the grievances of working people and the loss in manufacturing employment,” he explains. “There’s a tension there between rich backers seeking radical free-market policies, and this narrative of bringing back British jobs and industrial revival.”

Holding on to Power

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

Recent research in the American Economic Review analysed 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 nations run by populist rulers than in similar economies with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance typically go hand in hand with populist rule,” contend the paper’s authors.

A further interesting result of the research, however, is that despite their economic costs, these leaders tend to be good at holding on to power, lasting on average eight years, compared with shorter tenures for mainstream politicians.

Put simply, it is not clear whether even if their plans crash, such leaders face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their attraction reaches beyond mundane economics.

But returning to Buenos Aires, whether Milei’s populist project fails or is sustained through foreign assistance, the Argentine people have already paid significant costs.