Do Populist Administrations Always Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, scores of currency traders are selling US dollars on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October congressional elections in a nation accustomed to saving in the greenback.

“The best time to buy is currently,” says a arbolito, declining to give her name. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Like her, economic experts across the spectrum anticipate a depreciation of the Argentine peso once the voting is over. The president has placed a limit on the peso to control soaring price increases and now it is artificially high and reserves are exhausted, causing the national economy sluggish as consumers turn to cheap imports.

Fertile Ground

The nation is a very special case. The country has frequently been racked by debt defaults and economic crises and its voters have been susceptible over the years to leftwing populism, in the form of the powerful Peronism, and currently Milei’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, vowing muscular measures to reclaim control of the economy from traditional elites on behalf of the people.

These key characteristics are shared by his political partner in the United States, and by the UK politician, who presents himself as a beer-drinking champion of the common man despite being a privately educated ex-finance professional.

Until recent months, Milei’s approach – involving extensive privatisations and deep public spending cuts – had earned praise from international lenders for helping to bring inflation in check. The programme shares similarities with that of Milei’s idol Margaret Thatcher, who also saw inflation as a monster to be slain, no matter the cost.

But financial markets started to doubt in Milei’s radical project in recent months following a shaky result in provincial elections and multiple graft allegations. Only massive economic support by the US has prevented what seemed destined to be a major currency crisis.

Contradictions

The vote for Brexit several years ago arguably had some of the same logic, and its leader, the former prime minister, swept away concerns regarding fiscal impacts with a bullish determination to implement the “will of the people” despite elite opposition.

The Reform leader to date outlined limited plans in writing aside from proposals for large-scale removals, that he later seemed to adjust on the hoof. He aims to curb the central bank, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment as a central element of the populist package.

His tax and spending policies seem in flux: wary of being accused of proposing reckless spending, he lately dropped a promise for significant tax cuts. His second-in-command, Richard Tice, said they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will allow it to depict the populist as intending to reintroduce fiscal tightening – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of increasing public investment.

An economics professor notes there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by affluent backers demanding tax cuts and deregulation, yet also emphasizing the complaints of ordinary workers and the decline in manufacturing employment,” he says. “There is a conflict there between wealthy supporters seeking radical free-market policies, and this story of bringing back British jobs and reindustrialisation.”

Holding on to Power

Realistically, research indicates neither left nor right populists often perform poorly when faced with real-world challenges (although each charismatic individual promises something unique).

A recent paper from a leading journal examined the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, after 15 years, GDP per capita tends to be a tenth less in countries governed by populist rulers compared to similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand under populist governments,” contend the researchers.

Another intriguing finding from the study, however, is that despite their economic costs, these leaders tend to be good at retaining office, lasting on average eight years, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear whether even if their plans crash, populists immediately pay the price at the ballot box. Similar to pledges made to “take back control”, their attraction reaches beyond mundane economics.

Yet returning to Buenos Aires, regardless of if the government’s agenda fails or is kept on life support by external aid, Argentina’s citizens are already bearing significant costs.