Can Populist Administrations Always Wreck the Economy?

“Exchange, exchange.” Under the blazing sun, scores of currency traders are selling American currency along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the October 26 midterm elections in a country accustomed to holding the greenback.

“The best time to buy is currently,” states one arbolito, declining to give her identity. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”

Similar to her, economic experts from all backgrounds anticipate a devaluation of the national currency once the election concludes. The president has imposed a limit on the peso to control triple-digit inflation and currently it remains overvalued and reserves are exhausted, causing the national economy sluggish as buyers opt for low-cost foreign goods.

Fertile Ground

Argentina is a very special case. The country has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been susceptible over the years to leftwing populism, in the form of the powerful Peronism, and now Milei’s rightwing version.

The president is a textbook populist: charismatic, unconventional, vowing forceful measures to reclaim control of the economy from traditional elites on behalf of the people.

These key characteristics are also seen in his ally to the north, and by the UK politician, who styles himself as a beer-drinking champion of the common man despite being a public school-educated former stockbroker.

Until recent months, Milei’s approach – involving widespread sell-offs and severe budget reductions – had earned praise from international lenders for contributing to bring price rises under control. This plan has something in common with that of his political hero the former UK prime minister, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

However investors began losing confidence in Milei’s radical project in recent months after a poor performance in local polls and multiple corruption scandals. Solely massive economic support from abroad has averted what looked set to become a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 arguably had similar reasoning, and its leader, the former prime minister, swept away concerns regarding fiscal impacts with confident resolve to implement the “will of the people” in the face of the establishment’s horror.

The Reform leader to date outlined limited plans to paper aside from a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He wants to rein in the Bank of England, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment as a central element of the populist package.

His fiscal plans seem unsettled: concerned about being accused of proposing reckless spending, he lately dropped a promise for large tax reductions. His second-in-command, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

The opposition hopes this position will allow it to depict Farage as intending to bring back austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of boosting government spending.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for tax cuts and reduced rules, but also talking a lot about the grievances of working people and the loss of industrial jobs,” he says. “There’s a tension here among wealthy supporters seeking Thatcherism on steroids, and this story of bringing back UK employment 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 claims to offer distinct solutions).

A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, after 15 years, gross domestic product per head tends to be a tenth less in countries governed by populist leaders compared to comparable countries with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions typically occur together with populist rule,” contend the researchers.

A further interesting result from the study, however, is even with their negative impacts, populist figures are often effective at retaining office, lasting on average eight years, versus shorter tenures for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

But returning to Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support through foreign assistance, the Argentine people are already bearing a heavy price.