Can Populist Administrations Inevitably Crash the Economic System?

“Dollars, dollars.” Under the blazing sun, dozens of currency traders are offering American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a country long used to saving in the greenback.

“The best time to buy is now,” says one arbolito, refusing to provide her name. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Similar to her, economic experts from all backgrounds anticipate a depreciation of the Argentine peso after the voting is over. President Javier Milei has imposed a cap on the currency to tame triple-digit inflation and now it remains overvalued and foreign reserves are depleted, causing the national economy stagnant as buyers turn to cheap imports.

Fertile Ground

The nation represents a unique situation. Argentina has been repeatedly racked by debt defaults and economic crises and the electorate have been susceptible over the years to leftwing populism, such as the influential Peronist movement, and now Milei’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, promising forceful measures to wrestle back command of economic management from the establishment for the benefit of ordinary citizens.

These defining traits are shared by his ally to the north, and by the UK politician, who styles himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, Milei’s approach – including widespread sell-offs and severe public spending cuts – had earned praise from the IMF for helping to control price rises in check. This plan shares similarities with the policies of his political hero the former UK prime minister, who also saw inflation as a monster to be defeated, no matter the cost.

But investors started to doubt in the government’s agenda lately following a poor performance in provincial elections and a series of graft allegations. Only large-scale economic support from abroad has averted what looked set to become a full-blown currency crisis.

Inconsistencies

The 2016 referendum several years ago arguably had similar reasoning, and its leader, the former prime minister, swept away doubts about economic detail with a bullish determination to implement the “will of the people” in the face of elite opposition.

Farage has so far outlined limited plans in writing aside from a call for mass deportations, which he subsequently seemed to adjust spontaneously. He aims to curb the Bank of England, possibly ditching its governor, Andrew Bailey, 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 a Liz Truss-style splurge, he recently abandoned a promise for significant tax cuts. His second-in-command, the party chairman, said they would focus instead on reductions in government expenditure.

The opposition hopes this stance will enable it to depict the populist as intending to reintroduce fiscal tightening – a point the chancellor has emphasized often, comparing it unfavorably to her approach of boosting government spending.

An economics professor notes there are contradictions in Farage’s economic programme, as it stands. “Reform is funded by very wealthy people calling for tax cuts and deregulation, but also emphasizing the grievances of ordinary workers and the decline of industrial jobs,” he explains. “There’s a tension here among rich backers seeking Thatcherism on steroids, and this story of restoring UK employment and industrial revival.”

Holding on to Power

In truth, research indicates neither left nor right populists often perform poorly when confronting practical difficulties (though of course every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, over the long term, gross domestic product per head tends to be 10% lower in countries run by populist rulers compared to similar economies under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” argue the researchers.

Another intriguing finding of the research, though, is even with their negative impacts, these leaders tend to be good at retaining office, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.

In other words, it is not clear whether even if their policies fail, such leaders immediately pay the price at the ballot box. Similar to pledges made to “take back control”, their attraction reaches beyond everyday financial matters.

But back in Buenos Aires, whether the government’s agenda collapses or is kept on life support through foreign assistance, Argentina’s citizens are already bearing a heavy price.