Can Populist Administrations Always Wreck the Economy?

“Exchange, exchange.” Under the scorching heat, dozens of currency traders are offering American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 congressional elections in a nation accustomed to holding the US dollar.

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

Like her, economists across the spectrum anticipate a depreciation of the Argentine peso once the voting is over. The president has placed a cap on the peso to tame triple-digit inflation and now it is overvalued and foreign reserves are exhausted, leaving Argentina’s economy sluggish as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been hit by debt defaults and economic crises and the electorate have been susceptible for decades to left-leaning populist movements, such as the powerful Peronism, and currently the president’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, promising muscular measures to reclaim control of economic management from traditional elites for the benefit of the people.

These defining traits are also seen in his political partner in the United States, as well as the UK politician, who styles himself as a beer-drinking champion of the common man even though he is a privately educated former stockbroker.

Until recent months, the president’s strategy – involving extensive privatisations and severe budget reductions – had earned praise from the IMF for helping to control price rises in check. The programme has something in common with that of Milei’s idol Margaret Thatcher, who also saw inflation as a monster to be defeated, no matter the cost.

But financial markets began losing confidence in Milei’s radical project in recent months following a shaky result in local polls and multiple graft allegations. Only massive economic support from abroad has averted what seemed destined to be a major currency crisis.

Contradictions

The vote for Brexit in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, swept away doubts about economic detail with confident resolve to enact public demand in the face of elite opposition.

The Reform leader has so far committed few policies to paper except for a call for large-scale removals, that he later appeared to revise on the hoof. He wants to curb the Bank of England, perhaps even ditching its governor, Andrew Bailey, with distrust of a stodgy establishment being a key part of the populist package.

His fiscal plans appear to be unsettled: concerned about facing criticism for planning reckless spending, he lately dropped a pledge to make large tax cuts. His Reform party deputy, the party chairman, said they would focus instead on reductions in government expenditure.

The opposition aims this position will allow it to depict Farage as planning to bring back austerity – an argument the chancellor has made repeatedly, contrasting it with her approach of increasing public investment.

An economics professor says there are contradictions within the populist platform, such as it is. “Reform are bankrolled by very wealthy people demanding tax cuts and reduced rules, but also talking a lot about the complaints of working people and the loss in manufacturing employment,” he says. “There’s a tension there among wealthy supporters seeking Thatcherism on steroids, and this story of restoring British jobs and industrial revival.”

Holding on to Power

Realistically, the evidence suggests populists of any stripe tend to fare well when confronting practical difficulties (though of course each charismatic individual promises something unique).

Recent research from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, over the long term, GDP per capita tends to be a tenth less in nations run by populist leaders compared to similar economies with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions typically occur together under populist governments,” contend the paper’s authors.

Another intriguing finding from the study, however, is even with their negative impacts, these leaders tend to be good at holding on to power, remaining in power for a considerable time, compared with four for their more moderate equivalents.

Put simply, it is not clear that even when their policies fail, populists face immediate consequences in elections. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

Yet returning to Buenos Aires, whether Milei’s populist project collapses or is kept on life support through foreign assistance, Argentina’s citizens have already paid a heavy price.