Do Populist-Led Administrations Always Wreck the Economic System?

“Exchange, exchange.” Under the blazing sun, scores of money changers are offering American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the 26 October midterm elections in a country long used to holding the greenback.

“The best time to buy is currently,” says one arbolito, refusing to provide her name. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”

Like her, economists across the spectrum anticipate a devaluation of the Argentine peso once the voting is over. The president has imposed a limit on the currency to control triple-digit inflation and now it remains overvalued and reserves are exhausted, leaving Argentina’s economy stagnant as buyers turn to cheap imports.

Fertile Ground

Argentina represents a unique situation. The country has been repeatedly racked by sovereign defaults and financial turmoil and the electorate have been susceptible for decades to leftwing populism, in the form of the influential Peronist movement, and currently the president’s conservative populism.

The president is a textbook populist: charismatic, unconventional, promising muscular measures to reclaim control of the economy from the establishment on behalf of ordinary citizens.

These defining traits are also seen in his political partner to the north, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man despite being a privately educated ex-finance professional.

Up until lately, Milei’s approach – including extensive privatisations and deep public spending cuts – had won plaudits from international lenders for helping to bring price rises under control. This plan has something in common with the policies of his political hero Margaret Thatcher, who also saw rising prices as a dragon to be defeated, regardless of the consequences.

However investors began losing confidence in the government’s agenda in recent months following a poor performance in local polls and a series of corruption scandals. Only massive financial intervention from abroad has prevented what seemed destined to be a major monetary collapse.

Inconsistencies

The vote for Brexit several years ago arguably had similar reasoning, and its leader, the former prime minister, swept away doubts regarding fiscal impacts with a bullish determination to implement the “will of the people” in the face of the establishment’s horror.

The Reform leader to date committed few policies to paper except for a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He wants to rein in the Bank of England, possibly replacing its head, the incumbent, with distrust of a stodgy establishment as a central element of the populist package.

His fiscal plans seem in flux: concerned about being accused of planning a Liz Truss-style splurge, he recently abandoned a promise to make significant tax cuts. His second-in-command, the party chairman, stated they would focus instead on reductions in government expenditure.

The opposition hopes this position will enable it to portray Farage as intending to bring back austerity – a point the chancellor has made repeatedly, contrasting it with her approach of boosting government spending.

Jo Michell notes there are contradictions in Farage’s economic programme, as it stands. “Reform are bankrolled by very wealthy people demanding lower taxes and reduced rules, yet also talking a lot about the complaints of ordinary workers and the loss of industrial jobs,” he says. “There is a conflict here between wealthy supporters seeking radical free-market policies, and this narrative of bringing back British jobs and reindustrialisation.”

Maintaining Control

In truth, research suggests neither left nor right populists often perform poorly when confronting real-world challenges (although each charismatic individual claims to offer distinct solutions).

A recent paper from a leading journal analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, after 15 years, GDP per capita tends to be 10% lower in nations run by populist leaders compared to similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically go hand in hand under populist governments,” argue the paper’s authors.

A further interesting result of the research, however, is despite their economic costs, populist figures tend to be good at holding on to power, remaining in power for eight years, versus shorter tenures for mainstream politicians.

In other words, it is not clear that even when their plans crash, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction reaches beyond mundane economics.

But back in Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support through foreign assistance, Argentina’s citizens have already paid significant costs.