Can Populist-Led Administrations Inevitably Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, scores of money changers are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving before the 26 October congressional elections in a nation accustomed to saving in the US dollar.

“The optimal moment for purchasing is now,” states one arbolito, refusing to provide her name. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”

Like her, economists across the spectrum expect a depreciation of the national currency after the election is over. President Javier Milei has placed a limit on the currency to control soaring price increases and now it is artificially high and reserves are exhausted, leaving Argentina’s economy stagnant as consumers turn to low-cost foreign goods.

Fertile Ground

The nation represents a unique situation. The country has been repeatedly hit by sovereign defaults and economic crises and its voters have been susceptible for decades to leftwing populism, in the form of the powerful Peronist movement, and now Milei’s conservative populism.

Milei is a textbook populist: captivating, iconoclastic, promising muscular policies to wrestle back control of economic management from the establishment on behalf of the people.

These defining traits are shared by his ally to the north, as well as Nigel Farage, who presents himself as a pint-swilling people’s champion despite being a privately educated ex-finance professional.

Up until lately, Milei’s approach – including widespread sell-offs and severe budget reductions – had won plaudits from international lenders for contributing to bring inflation under control. The programme has something in common with that of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a monster to be defeated, no matter the cost.

However investors began losing confidence in Milei’s radical project lately following a poor performance in provincial elections and a series of corruption scandals. Only large-scale economic support by the US has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 arguably had some of the same logic, and its leader, Boris Johnson, swept away concerns about economic detail with confident resolve to implement the “will of the people” in the face of elite opposition.

The Reform leader to date committed few policies to paper except for proposals for mass deportations, which he subsequently appeared to revise on the hoof. He aims to rein in the Bank of England, perhaps even ditching its governor, Andrew Bailey, with scepticism toward traditional institutions as a central element of the populist package.

His fiscal plans seem in flux: wary of facing criticism for planning a Liz Truss-style splurge, he recently dropped a pledge for large tax reductions. His second-in-command, Richard Tice, said they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will allow it to portray Farage as intending to reintroduce austerity – a point the chancellor has emphasized often, contrasting it with her approach of boosting government spending.

Jo Michell says there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for lower taxes and reduced rules, yet also emphasizing the complaints of working people and the loss of industrial jobs,” he says. “There’s a tension here among wealthy supporters who want Thatcherism on steroids, and this narrative of restoring British jobs and reindustrialisation.”

Maintaining Control

Realistically, research indicates populists of any stripe often perform poorly when confronting real-world challenges (though of course each charismatic individual claims to offer distinct solutions).

Recent research in the American Economic Review examined the performance of dozens of populist leaders, from 1900 to 2020. It found that on average, over the long term, gross domestic product per head is often 10% lower in nations governed by populist rulers compared to similar economies under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the decay of governance typically go hand in hand under populist governments,” argue the researchers.

A further interesting result from the study, though, is that even with their negative impacts, populist figures are often effective at holding on to power, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.

Put simply, it remains uncertain whether even if their plans crash, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond everyday financial matters.

Yet returning to Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support by external aid, Argentina’s citizens are already bearing significant costs.