Do Populist-Led Administrations Inevitably Wreck the Economy?

“Cambio, cambio.” Under the blazing sun, scores of money changers are selling American currency along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the October 26 congressional elections in a country accustomed to saving in the US dollar.

“The optimal moment for purchasing is currently,” states a arbolito, declining to give her name. “[The dollar] went down slightly but it is a fake-out – it will rebound.”

Similar to her, economists across the spectrum anticipate a depreciation of the Argentine peso after the election concludes. The president has placed a limit on the peso to tame triple-digit price increases and currently it is overvalued and foreign reserves are exhausted, causing Argentina’s economy sluggish as consumers opt for cheap imports.

Fertile Ground

Argentina is a very special case. Argentina has frequently been racked by debt defaults and economic crises and its voters have been receptive for decades to left-leaning populist movements, such as the powerful Peronist movement, and currently Milei’s conservative populism.

Milei is a textbook populist: captivating, unconventional, vowing muscular measures to reclaim command of the economy from the establishment for the benefit of the people.

These key characteristics are shared by his political partner in the United States, and by the UK politician, who presents himself as a beer-drinking people’s champion despite being a privately educated former stockbroker.

Until recent months, Milei’s approach – involving widespread sell-offs and deep budget reductions – had won plaudits from the IMF for helping to control inflation in check. This plan shares similarities with that of his political hero the former UK prime minister, who also saw rising prices as a monster to be defeated, no matter the cost.

But investors began losing confidence in Milei’s radical project in recent months following a poor performance in provincial elections and a series of corruption scandals. Only large-scale financial intervention by the US has averted what looked set to become a major currency crisis.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its figurehead, the former prime minister, dismissed concerns about economic detail with a bullish determination to implement the “will of the people” despite the establishment’s horror.

The Reform leader to date outlined limited plans in writing aside from a call for mass deportations, which he subsequently appeared to revise spontaneously. He wants to curb the central bank, perhaps even ditching its governor, the incumbent, with distrust toward traditional institutions being a key part of populist rhetoric.

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

Labour hopes this position will enable it to portray Farage as planning to bring back austerity – a point the chancellor has emphasized often, contrasting it with her approach of boosting government spending.

Jo Michell says there exist inconsistencies in Farage’s economic programme, such as it is. “The party is funded by affluent backers calling for tax cuts and deregulation, but also emphasizing the grievances of working people and the loss in manufacturing employment,” he explains. “There is a conflict here among rich backers who want radical free-market policies, and this story of restoring British jobs and reindustrialisation.”

Maintaining Control

Realistically, research suggests neither left nor right populists tend to fare well when faced with practical difficulties (though of course each charismatic individual promises something unique).

Recent research from a leading journal examined the outcomes of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, GDP per capita is often 10% lower in nations run by populist leaders than in comparable countries with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually occur together under populist governments,” contend the researchers.

A further interesting result from the study, though, is despite their economic costs, populist figures tend to be good at retaining office, remaining in power for a considerable time, compared with shorter tenures for their more moderate equivalents.

Put simply, it is not clear that even when their plans crash, populists immediately pay the price in elections. Like the Brexiters’ promise to “take back control”, their attraction extends past mundane economics.

But back in Buenos Aires, whether Milei’s populist project fails or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.