Do Populist Administrations Inevitably Crash the Economic System?

“Cambio, cambio.” Beneath the blazing sun, scores of money changers are offering US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving ahead of the October 26 congressional elections in a country long used to holding the greenback.

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

Similar to her, economic experts from all backgrounds expect a depreciation of the Argentine peso once the voting is over. The president has imposed a limit on the peso to control triple-digit price increases and currently it is artificially high and foreign reserves are exhausted, leaving Argentina’s economy sluggish as buyers turn to low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by debt defaults and financial turmoil and its voters have been receptive over the years to left-leaning populist movements, such as the influential Peronist movement, and currently Milei’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, promising muscular measures to wrestle back control of economic management from traditional elites on behalf of ordinary citizens.

These defining traits are also seen in his ally in the United States, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man even though he is a public school-educated former stockbroker.

Up until lately, Milei’s approach – including extensive privatisations and severe budget reductions – had won plaudits from the IMF for helping to control price rises under control. The programme shares similarities with the policies of Milei’s idol the former UK prime minister, who also saw inflation as a monster to be defeated, no matter the cost.

However financial markets began losing confidence 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 looked set to become a major currency crisis.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its leader, the former prime minister, dismissed concerns about economic detail with a bullish determination to implement the “will of the people” despite elite opposition.

Farage to date outlined limited plans in writing aside from a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He aims to curb the Bank of England, possibly ditching its governor, the incumbent, 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 planning reckless spending, 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 position will enable it to portray the populist as intending to bring back austerity – a point the chancellor has emphasized often, contrasting it with her strategy of increasing government spending.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for tax cuts and deregulation, but also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict there among rich backers seeking Thatcherism on steroids, and this narrative of restoring British jobs and reindustrialisation.”

Holding on to Power

Realistically, the evidence indicates neither left nor right populists often perform poorly when faced with real-world challenges (though of course every populist leader claims to offer something unique).

A recent paper in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. It found typically, over the long term, gross domestic product per head is often 10% lower in nations governed by populist rulers compared to similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance typically occur together with populist rule,” contend the paper’s authors.

Another intriguing finding from the study, though, is even with their negative impacts, these leaders tend to be good at holding on to power, remaining in power for eight years, versus shorter tenures for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, populists face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their appeal reaches beyond mundane economics.

Yet back in Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, Argentina’s citizens have already paid a heavy price.