Do Populist Administrations Always Crash the Economy?

“Dollars, dollars.” Beneath the scorching heat, dozens of money changers are offering US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming ahead of the October 26 midterm elections in a country accustomed to holding the US dollar.

“The optimal moment to buy is now,” 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 anticipate a devaluation of the national currency once the voting concludes. The president has placed a cap on the currency to tame soaring price increases and now it remains artificially high and reserves are exhausted, leaving the national economy sluggish as buyers turn to low-cost foreign goods.

Fertile Ground

Argentina is a very special case. The country has frequently been racked by sovereign defaults and financial turmoil and the electorate have been susceptible for decades to left-leaning populist movements, in the form of the powerful Peronist movement, and now the president’s conservative populism.

Milei epitomizes populist leadership: charismatic, unconventional, promising forceful measures to reclaim command of the economy from the establishment for the benefit of ordinary citizens.

These defining traits are also seen in his ally in the United States, as well as the UK politician, who presents himself as a pint-swilling champion of the common man despite being a public school-educated ex-finance professional.

Until recent months, the president’s strategy – involving widespread sell-offs and severe budget reductions – had earned praise from international lenders for helping to control price rises under control. This plan shares similarities with that 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 lately following a poor performance in provincial elections and a series of graft allegations. Only massive financial intervention from abroad has averted what looked set to become a major monetary collapse.

Inconsistencies

The vote for Brexit in 2016 likely contained similar reasoning, and its figurehead, Boris Johnson, dismissed doubts regarding fiscal impacts with a bullish determination to enact public demand despite elite opposition.

Farage has so far outlined limited plans in writing aside from proposals for mass deportations, that he later appeared to revise spontaneously. He wants to curb the Bank of England, possibly replacing its head, the incumbent, with scepticism toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies seem in flux: concerned about facing criticism for planning a Liz Truss-style splurge, he lately abandoned a pledge to make large tax reductions. His second-in-command, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will allow it to portray the populist as planning to bring back fiscal tightening – an argument Rachel Reeves has emphasized often, comparing it unfavorably to her strategy of increasing government spending.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by very wealthy people calling for lower taxes and reduced rules, yet also talking a lot about the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension there between wealthy supporters seeking radical free-market policies, and this narrative of restoring UK employment and reindustrialisation.”

Holding on to Power

Realistically, research indicates neither left nor right populists tend to fare well when confronting practical difficulties (though of course every populist leader claims to offer distinct solutions).

A recent paper from a leading journal examined the outcomes of dozens of populist leaders, over more than a century. It found typically, over the long term, gross domestic product per head tends to be 10% lower in countries governed by populist leaders compared to comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically occur together with populist rule,” contend the researchers.

A further interesting result 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 a considerable time, versus four for mainstream politicians.

In other words, it is not clear that even when their plans crash, populists immediately pay the price in elections. Like the Brexiters’ promise to “take back control”, their appeal extends past mundane economics.

But back in Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, Argentina’s citizens have already paid a heavy price.