Can Populist Administrations Always Wreck the Economic System?

“Cambio, cambio.” Under the blazing sun, dozens of currency traders are hawking US dollars along Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 congressional elections in a country long used to holding the greenback.

“The optimal moment for purchasing is now,” states a arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”

Like her, economic experts across the spectrum anticipate a devaluation of the Argentine peso after the voting concludes. The president has imposed a limit on the peso to control triple-digit price increases and currently it is overvalued and foreign reserves are exhausted, causing Argentina’s economy stagnant as buyers opt for cheap imports.

Fertile Ground

The nation is a very special case. Argentina has been repeatedly racked by debt defaults and financial turmoil and its voters have been receptive for decades to left-leaning populist movements, in the form of the powerful Peronist movement, and now the president’s rightwing version.

Milei epitomizes populist leadership: captivating, unconventional, promising muscular policies to wrestle back control of the economy from traditional elites on behalf of ordinary citizens.

These key characteristics are also seen in his political partner to the north, and by Nigel Farage, who presents himself as a pint-swilling champion of the common man despite being a privately educated ex-finance professional.

Until recent months, the president’s strategy – involving widespread sell-offs and deep public spending cuts – had won plaudits from the IMF for helping to bring inflation in check. The programme has something in common with the policies of his political hero the former UK prime minister, who similarly viewed rising prices as a dragon to be slain, regardless of the consequences.

But financial markets began losing confidence in Milei’s radical project lately following a shaky result in provincial elections and multiple corruption scandals. Solely large-scale financial intervention by the US has prevented what seemed destined to be a major monetary collapse.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its figurehead, Boris Johnson, swept away concerns regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of the establishment’s horror.

Farage to date outlined limited plans to paper except for a call for large-scale removals, that he later seemed to adjust on the hoof. He aims to rein in the Bank of England, possibly ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment being a key part of the populist package.

His tax and spending policies seem in flux: wary of facing criticism for planning reckless spending, he recently dropped a pledge to make large tax cuts. His Reform party deputy, Richard Tice, said they would concentrate instead on reductions in government expenditure.

The opposition hopes this stance will enable it to portray Farage as intending to reintroduce fiscal tightening – an argument the chancellor has emphasized often, contrasting it with her approach of boosting public investment.

An economics professor notes there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for lower taxes and reduced rules, but also talking a lot about the complaints of working people and the loss in manufacturing employment,” he explains. “There’s a tension here among rich backers who want radical free-market policies, and this narrative of bringing back UK employment and industrial revival.”

Holding on to Power

Realistically, research suggests populists of any stripe tend to fare well when faced with practical difficulties (although every populist leader promises something unique).

A recent paper in the American Economic Review examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, over the long term, gross domestic product per head tends to be 10% lower in countries run by populist leaders than in comparable countries with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically occur together with populist rule,” contend the paper’s authors.

Another intriguing finding of the research, though, is that even with their negative impacts, populist figures are often effective at holding on to power, lasting on average eight years, compared with four for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

Yet returning to Buenos Aires, whether Milei’s populist project fails or is kept on life support by external aid, the Argentine people have already paid a heavy price.