Do Populist-Led Administrations Always Crash the Economy?

“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are hawking American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a nation accustomed to saving in the US dollar.

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

Similar to her, economic experts from all backgrounds expect a depreciation of the national currency after the voting concludes. President Javier Milei has imposed a limit on the currency to tame triple-digit price increases and now it remains artificially high and reserves are depleted, causing Argentina’s economy sluggish as consumers turn to cheap imports.

Ideal Conditions

The nation is a very special case. The country has been repeatedly racked by sovereign defaults and financial turmoil and the electorate have been receptive for decades to leftwing populism, such as the powerful Peronist movement, and now Milei’s conservative populism.

The president epitomizes populist leadership: charismatic, unconventional, promising muscular policies to wrestle back control of the economy from traditional elites on behalf of the people.

These defining traits are shared by his political partner to the north, and by the UK politician, who styles himself as a pint-swilling people’s champion despite being a public school-educated ex-finance professional.

Up until lately, Milei’s approach – including widespread sell-offs and deep public spending cuts – had won plaudits from international lenders for contributing to control price rises under control. The programme shares similarities with that of his political hero Margaret Thatcher, who also saw rising prices as a monster to be slain, no matter the cost.

However financial markets started to doubt in the government’s agenda in recent months after a shaky result in local polls and a series of graft allegations. Only massive financial intervention from abroad has averted what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its leader, Boris Johnson, swept away concerns about economic detail with a bullish determination to enact public demand despite the establishment’s horror.

Farage has so far outlined limited plans in writing except for a call for mass deportations, that he later seemed to adjust on the hoof. He wants to curb the central bank, possibly ditching its governor, Andrew Bailey, with distrust of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans seem unsettled: concerned about being accused of proposing a Liz Truss-style splurge, he lately abandoned a promise to make significant tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on reductions in government expenditure.

The opposition hopes this stance will allow it to depict the populist as intending to reintroduce austerity – an argument the chancellor has made repeatedly, comparing it unfavorably to her approach of boosting government spending.

An economics professor says there exist inconsistencies within the populist platform, such as it is. “Reform is funded by affluent backers calling for tax cuts and deregulation, yet also talking a lot about the complaints of working people and the loss of industrial jobs,” he explains. “There’s a tension here among rich backers seeking Thatcherism on steroids, and this narrative of restoring UK employment and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well when confronting real-world challenges (though of course each charismatic individual promises something unique).

Recent research from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found that on average, over the long term, GDP per capita tends to be 10% lower in countries governed by populist leaders than in similar economies with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand under populist governments,” argue the paper’s authors.

A further interesting result from the study, however, is that even with their negative impacts, these leaders are often effective at retaining office, lasting on average a considerable time, versus four for their more moderate equivalents.

In other words, it remains uncertain whether even if their policies fail, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.

Yet back in Buenos Aires, whether Milei’s populist project collapses or is sustained through foreign assistance, Argentina’s citizens are already bearing significant costs.