Do Populist-Led Administrations Always Wreck the Economy?

“Cambio, cambio.” Under the blazing sun, scores of currency traders are offering American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the 26 October midterm elections in a nation long used to holding the US dollar.

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

Similar to her, economic experts from all backgrounds anticipate a depreciation of the national currency after the election concludes. The president has placed a cap on the currency to tame soaring price increases and currently it remains overvalued and foreign reserves are depleted, causing the national economy sluggish as consumers opt for cheap imports.

Ideal Conditions

The nation is a very special case. Argentina has been repeatedly racked by sovereign defaults and economic crises and the electorate have been receptive for decades to leftwing populism, in the form of the influential Peronism, and currently the president’s conservative populism.

Milei is a textbook populist: captivating, iconoclastic, vowing muscular policies to wrestle back command of economic management from the establishment for the benefit of the people.

These defining traits are shared by his political partner in the United States, as well as Nigel Farage, who presents himself as a beer-drinking people’s champion even though he is a privately educated ex-finance professional.

Up until lately, Milei’s approach – involving widespread sell-offs and severe public spending cuts – had won plaudits from the IMF for helping to control inflation under control. This plan shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.

But investors began losing confidence in the government’s agenda in recent months after a shaky result in provincial elections and multiple corruption scandals. Only large-scale economic support by the US has prevented what seemed destined to be a major currency crisis.

Contradictions

The vote for Brexit several years ago likely contained some of the same logic, and its leader, the former prime minister, dismissed concerns regarding fiscal impacts with confident resolve to implement public demand despite the establishment’s horror.

Farage has so far outlined limited plans to paper except for proposals for mass deportations, that he later appeared to revise on the hoof. He aims to rein in the central bank, possibly replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of the populist package.

His fiscal plans appear to be in flux: wary of being accused of proposing a Liz Truss-style splurge, he recently dropped a promise for significant tax reductions. His second-in-command, the party chairman, stated they would focus instead on reductions in government expenditure.

Labour hopes this position will allow it to portray the populist as planning to bring back austerity – a point Rachel Reeves has emphasized often, comparing it unfavorably to her approach of increasing public investment.

An economics professor says there exist inconsistencies in Farage’s economic programme, such as it is. “The party is funded by very wealthy people demanding lower taxes and deregulation, but also talking a lot about the complaints of working people and the decline of industrial jobs,” he says. “There is a conflict there between wealthy supporters who want Thatcherism on steroids, and this story of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, the evidence suggests neither left nor right populists tend to fare well when faced with practical difficulties (although every populist leader promises something unique).

Recent research from a leading journal analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found typically, after 15 years, gross domestic product per head tends to be 10% lower in countries governed by populist rulers compared to comparable countries with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically go hand in hand with populist rule,” argue the researchers.

A further interesting result of the research, however, is despite their economic costs, populist figures tend to be good at holding on to power, lasting on average eight years, compared with four for mainstream politicians.

Put simply, it remains uncertain whether even if their policies fail, populists face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their appeal extends past everyday financial matters.

But back in Buenos Aires, whether the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people have already paid a heavy price.