Do Populist-Led Administrations Inevitably Wreck the Economic System?

“Dollars, dollars.” Under the scorching heat, dozens of money changers are hawking US dollars along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the 26 October midterm elections in a nation long used to saving in the US dollar.

“The best time to buy is now,” states a arbolito, declining to give her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Like her, economists from all backgrounds expect a depreciation of the national currency after the election concludes. President Javier Milei has imposed a limit on the currency to control soaring inflation and now it is overvalued and reserves are depleted, causing the national economy stagnant as buyers opt for cheap imports.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by sovereign defaults and financial turmoil and its voters have been receptive for decades to leftwing populism, in the form of the influential Peronist movement, and currently Milei’s rightwing version.

Milei epitomizes populist leadership: charismatic, unconventional, vowing forceful measures to wrestle back control of the economy from the establishment on behalf of ordinary citizens.

These defining traits are also seen in his political partner to the north, as well as Nigel Farage, who styles himself as a pint-swilling people’s champion despite being a privately educated former stockbroker.

Until recent months, Milei’s approach – involving extensive privatisations and deep budget reductions – had won plaudits from international lenders for contributing to control inflation in check. The programme has something in common with that of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

But investors began losing confidence in the government’s agenda in recent months following a shaky result in local polls and a series of graft allegations. Solely massive economic support by the US has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its leader, the former prime minister, swept away doubts regarding fiscal impacts with confident resolve to implement the “will of the people” despite elite opposition.

The Reform leader to date committed few policies to paper aside from a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He wants to curb the Bank of England, possibly replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of the populist package.

His fiscal plans seem unsettled: concerned about being accused of planning a Liz Truss-style splurge, he lately abandoned a promise for large tax reductions. His second-in-command, Richard Tice, said they would concentrate instead on reductions in government expenditure.

Labour hopes this position will allow it to portray the populist as planning to bring back fiscal tightening – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of increasing public investment.

An economics professor says there are contradictions in Farage’s economic programme, as it stands. “The party is funded by very wealthy people calling for lower taxes and reduced rules, yet also emphasizing the complaints of working people and the loss of industrial jobs,” he says. “There’s a tension here between rich backers who want Thatcherism on steroids, and this narrative of bringing back UK employment and industrial revival.”

Holding on to Power

In truth, the evidence indicates populists of any stripe often perform poorly when faced with practical difficulties (although every populist leader promises distinct solutions).

A recent paper from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found typically, over the long term, GDP per capita is often 10% lower in countries run by populist leaders compared to similar economies with more mainstream regimes.

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

Another intriguing finding of the research, however, is despite their economic costs, these leaders tend to be good at holding on to power, lasting on average a considerable time, compared with four for mainstream politicians.

In other words, it is not clear whether even if their policies fail, populists immediately pay the price in elections. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.

But back in Buenos Aires, whether Milei’s populist project fails or is kept on life support by external aid, the Argentine people are already bearing significant costs.