Can Populist Administrations Inevitably Crash the Economy?

“Dollars, dollars.” Under 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 (“little trees”), they are thriving before the October 26 congressional 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 identity. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economists from all backgrounds expect a depreciation of the Argentine peso after the voting concludes. President Javier Milei has placed a limit on the currency to tame triple-digit inflation and currently it is artificially high and reserves are exhausted, leaving the national economy stagnant as buyers turn to cheap imports.

Fertile Ground

The nation is a very special case. Argentina has frequently been racked by sovereign defaults and economic crises and the electorate have been receptive for decades to left-leaning populist movements, such as the influential Peronist movement, and now Milei’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, promising muscular policies to reclaim control of the economy from traditional elites for the benefit of ordinary citizens.

These defining traits are shared by his ally to the north, as well as Nigel Farage, who presents himself as a beer-drinking champion of the common man despite being a privately educated ex-finance professional.

Until recent months, Milei’s approach – including widespread sell-offs and deep public spending cuts – had earned praise from the IMF for contributing to control price rises in check. This plan shares similarities with the policies of Milei’s idol the former UK prime minister, who also saw inflation as a dragon to be slain, regardless of the consequences.

But investors began losing confidence in Milei’s radical project in recent months following a shaky result in local polls and a series of graft allegations. Solely massive financial intervention by the US has averted what seemed destined to be a full-blown currency crisis.

Inconsistencies

The 2016 referendum several years ago likely contained similar reasoning, and its figurehead, the former prime minister, swept away doubts about economic detail with a bullish determination to enact public demand in the face of elite opposition.

Farage to date committed few policies to paper except for proposals for large-scale removals, that he later seemed to adjust spontaneously. He wants to curb the central bank, possibly replacing its head, Andrew Bailey, with distrust of a stodgy establishment as a central element of the populist package.

His tax and spending policies seem unsettled: concerned about facing criticism for proposing a Liz Truss-style splurge, he recently abandoned a pledge to make large tax cuts. His second-in-command, Richard Tice, said they would focus instead on public spending cuts.

The opposition hopes this position will enable it to depict the populist as planning to bring back austerity – an argument Rachel Reeves has emphasized often, comparing it unfavorably to her strategy of boosting government spending.

Jo Michell notes there are contradictions in Farage’s economic programme, as it stands. “Reform are bankrolled by affluent backers calling for tax cuts and reduced rules, but also talking a lot about the grievances of working people and the decline of industrial jobs,” he says. “There’s a tension here between wealthy supporters seeking radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”

Holding on to Power

In truth, the evidence indicates neither left nor right populists often perform poorly when confronting practical difficulties (though of course each charismatic individual claims to offer distinct solutions).

A recent paper from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found typically, after 15 years, GDP per capita is often 10% lower in countries run by populist leaders compared to similar economies with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the decay of governance typically go hand in hand with populist rule,” argue the researchers.

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

Put simply, it is not clear whether even if their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past mundane economics.

Yet back in Buenos Aires, regardless of if the government’s agenda fails or is sustained by external aid, the Argentine people have already paid significant costs.