Do Populist-Led Administrations Always Crash the Economic System?

“Cambio, cambio.” Under the blazing sun, dozens of money changers are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving ahead of the 26 October congressional elections in a nation long used to saving in the US dollar.

“The optimal moment for purchasing is currently,” states a arbolito, refusing to provide her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Like her, economists across the spectrum anticipate a devaluation of the Argentine peso once the voting concludes. President Javier Milei has placed a cap on the peso to tame soaring inflation and currently it is artificially high and reserves are exhausted, causing Argentina’s economy sluggish as consumers opt for low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. The country has frequently been racked by debt defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronism, and now Milei’s conservative populism.

Milei is a textbook populist: captivating, unconventional, vowing muscular policies to wrestle back command of the economy from traditional elites on behalf of the people.

These defining traits are also seen in his political partner to the north, as well as Nigel Farage, who presents himself as a beer-drinking champion of the common man despite being a public school-educated former stockbroker.

Up until lately, the president’s strategy – involving extensive privatisations and severe public spending cuts – had won plaudits from international lenders for contributing to bring price rises under control. This plan shares similarities with that of Milei’s idol Margaret Thatcher, who also saw rising prices as a dragon to be slain, no matter the cost.

However financial markets began losing confidence in Milei’s radical project lately following a shaky result in local polls and multiple graft allegations. Only large-scale economic support by the US has averted what looked set to become a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its leader, Boris Johnson, dismissed doubts regarding fiscal impacts with a bullish determination to implement the “will of the people” despite elite opposition.

The Reform leader has so far outlined limited plans in writing aside from proposals for large-scale removals, which he subsequently appeared to revise spontaneously. He aims to rein in the central bank, perhaps even replacing its head, the incumbent, with scepticism of a stodgy establishment being a key part of the populist package.

His tax and spending policies seem unsettled: wary of facing criticism for planning reckless spending, he recently abandoned a pledge to make significant tax cuts. His Reform party deputy, Richard Tice, said they would focus instead on public spending cuts.

The opposition hopes this position will allow it to depict the populist as intending to bring back fiscal tightening – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of boosting government spending.

Jo Michell says there exist inconsistencies in Farage’s economic programme, such as it is. “The party is funded by very wealthy people calling for lower taxes and deregulation, but also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict here between wealthy supporters who want radical free-market policies, and this narrative of restoring UK employment and industrial revival.”

Maintaining Control

Realistically, research suggests neither left nor right populists often perform poorly when confronting practical difficulties (although each charismatic individual claims to offer something unique).

Recent research from a leading journal analysed the outcomes of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, after 15 years, gross domestic product per head is often 10% lower in nations run by populist leaders compared to similar economies with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually go hand in hand with populist rule,” contend the researchers.

A further interesting result from the study, however, is even with their negative impacts, populist figures tend to be good at retaining office, lasting on average a considerable time, versus shorter tenures for mainstream politicians.

Put simply, it remains uncertain whether even if their plans crash, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal extends past mundane economics.

But returning to Buenos Aires, regardless of if the government’s agenda fails or is kept on life support by external aid, the Argentine people are already bearing significant costs.