Do Populist Administrations Always Crash the Economic System?

“Cambio, cambio.” Under the scorching heat, scores of money changers are selling US dollars along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October congressional elections in a country long used to saving in the US dollar.

“The best time to buy is now,” says a arbolito, declining to give her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Similar to her, economists from all backgrounds anticipate a devaluation of the national currency after the election concludes. The president has imposed a cap on the peso to tame triple-digit inflation and now it is overvalued and foreign reserves are exhausted, causing the national economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has been repeatedly racked by sovereign defaults and economic crises and its voters have been receptive for decades to left-leaning populist movements, in the form of the powerful Peronism, and currently the president’s conservative populism.

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

These key characteristics are shared by his political partner to the north, as well as Nigel Farage, who presents himself as a pint-swilling champion of the common man even though he is a public school-educated ex-finance professional.

Up until lately, Milei’s approach – involving extensive privatisations and severe public spending cuts – had won plaudits from the IMF for helping to bring price rises in check. This plan shares similarities with the policies of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a dragon to be defeated, no matter the cost.

However financial markets started to doubt in the government’s agenda lately after a shaky result in local polls and multiple graft allegations. Only large-scale economic support from abroad has prevented what looked set to become a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 arguably had similar reasoning, and its figurehead, Boris Johnson, dismissed doubts about economic detail with a bullish determination to implement the “will of the people” in the face of the establishment’s horror.

Farage has so far outlined limited plans in writing aside from a call for mass deportations, which he subsequently appeared to revise spontaneously. He wants to rein in the Bank of England, possibly replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of the populist package.

His tax and spending policies seem in flux: concerned about being accused of proposing reckless spending, he lately abandoned a promise for large tax reductions. His Reform party deputy, the party chairman, said they would focus instead on public spending cuts.

Labour aims this position will enable it to depict Farage as planning to bring back fiscal tightening – an argument the chancellor has emphasized often, comparing it unfavorably to her approach of boosting government spending.

Jo Michell says there exist inconsistencies in Farage’s economic programme, such as it is. “Reform are bankrolled by affluent backers calling for lower taxes and deregulation, yet also emphasizing the complaints of ordinary workers and the decline of industrial jobs,” he explains. “There is a conflict here among wealthy supporters who want radical free-market policies, and this narrative of restoring British jobs and industrial revival.”

Holding on to Power

In truth, research suggests populists of any stripe tend to fare well when faced with real-world challenges (although every populist leader promises distinct solutions).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed that on average, over the long term, GDP per capita is often 10% lower in countries governed by populist rulers compared to similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions usually occur together under populist governments,” argue the paper’s authors.

Another intriguing finding of the research, however, is even with their negative impacts, these leaders tend to be good at holding on to power, remaining in power for eight years, versus shorter tenures for their more moderate equivalents.

In other words, it remains uncertain that even when their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction reaches beyond mundane economics.

Yet returning to Buenos Aires, whether the government’s agenda fails or is sustained by external aid, Argentina’s citizens are already bearing a heavy price.