Do Populist-Led Administrations Always Wreck the Economic System?

“Exchange, exchange.” Beneath the blazing sun, dozens of money changers are offering US dollars along Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a country accustomed to saving in the US dollar.

“The optimal moment to buy is now,” says one arbolito, refusing to provide her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Like her, economic experts across the spectrum anticipate a devaluation of the Argentine peso after the voting is over. The president has imposed a limit on the currency to control soaring inflation and currently it is overvalued and reserves are depleted, leaving Argentina’s economy sluggish as buyers turn to cheap imports.

Fertile Ground

The nation represents a unique situation. Argentina has been repeatedly hit by debt defaults and financial turmoil and the electorate have been receptive over the years to leftwing populism, in the form of the powerful Peronist movement, and currently Milei’s conservative populism.

Milei is a textbook populist: charismatic, unconventional, promising forceful measures to wrestle back command of the economy from traditional elites for the benefit of ordinary citizens.

These key characteristics are also seen in his political partner to the north, as well as the UK politician, who styles himself as a beer-drinking people’s champion even though he is a privately educated former stockbroker.

Up until lately, the president’s strategy – involving widespread sell-offs and deep public spending cuts – had won plaudits from international lenders for contributing to control price rises under control. The programme shares similarities with the policies of his political hero the former UK prime minister, who also saw rising prices as a dragon to be slain, no matter the cost.

However financial markets began losing confidence in the government’s agenda in recent months following a shaky result in local polls and multiple corruption scandals. Only large-scale financial intervention by the US has averted what looked set to become a major monetary collapse.

Contradictions

The vote for Brexit in 2016 likely contained similar reasoning, and its figurehead, Boris Johnson, swept away doubts about economic detail with a bullish determination to enact the “will of the people” despite the establishment’s horror.

The Reform leader has so far outlined limited plans to paper except for a call for large-scale removals, that he later appeared to revise on the hoof. He aims to rein in the central bank, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of populist rhetoric.

His fiscal plans seem in flux: concerned about being accused of 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 concentrate instead on public spending cuts.

The opposition aims this stance will enable it to depict the populist as intending to reintroduce fiscal tightening – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of increasing public investment.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, such as it is. “Reform is funded by affluent backers calling for tax cuts and deregulation, but also talking a lot about the grievances of ordinary workers and the decline in manufacturing employment,” he says. “There’s a tension here among rich backers who want radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists often perform poorly when confronting real-world challenges (although every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, after 15 years, GDP per capita tends to be 10% lower in countries run by populist leaders than in similar economies with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually go hand in hand under populist governments,” argue the paper’s authors.

Another intriguing finding of the research, however, is despite their economic costs, populist figures tend to be good at holding on to power, lasting on average a considerable time, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear whether even if their plans crash, populists immediately pay the price in elections. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if Milei’s populist project fails or is kept on life support through foreign assistance, Argentina’s citizens are already bearing a heavy price.