Can Populist-Led Administrations Inevitably Wreck the Economy?

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

“The optimal moment for purchasing is currently,” says a arbolito, refusing to provide her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Like her, economists across the spectrum expect a depreciation of the Argentine peso once the election is over. The president has placed a limit on the peso to tame soaring price increases and now it remains overvalued and foreign reserves are exhausted, causing Argentina’s economy sluggish as buyers turn to cheap imports.

Ideal Conditions

The nation is a very special case. The country has been repeatedly hit by sovereign defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, such as the powerful Peronist movement, and now Milei’s conservative populism.

Milei epitomizes populist leadership: captivating, iconoclastic, vowing muscular measures to wrestle back control of economic management from traditional elites on behalf of the people.

These defining traits are also seen in his political partner to the north, as well as the UK politician, who styles himself as a pint-swilling champion of the common man even though he is a public school-educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and deep public spending cuts – had won plaudits from international lenders for contributing to control price rises in check. This plan shares similarities with that of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a dragon to be slain, no matter the cost.

But investors began losing confidence in the government’s agenda lately following a shaky result in provincial elections and a series of graft allegations. Solely large-scale economic support by the US has averted what looked set to become a major currency crisis.

Contradictions

The vote for Brexit in 2016 likely contained similar reasoning, and its figurehead, the former prime minister, swept away concerns regarding fiscal impacts with a bullish determination to implement public demand despite elite opposition.

The Reform leader 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 aims to curb the central bank, perhaps even ditching its governor, Andrew Bailey, with distrust 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 abandoned a promise for significant tax cuts. His second-in-command, the party chairman, stated they would concentrate instead on reductions in government expenditure.

The opposition aims this stance will allow it to portray the populist as intending to reintroduce austerity – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of increasing government spending.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by affluent backers demanding tax cuts and reduced rules, but also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he explains. “There’s a tension here between wealthy supporters who want Thatcherism on steroids, and this narrative of restoring UK employment and industrial revival.”

Maintaining Control

In truth, research suggests populists of any stripe often perform poorly when faced with real-world challenges (although each charismatic individual promises distinct solutions).

A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, after 15 years, GDP per capita tends to be a tenth less in countries run by populist leaders than in comparable countries with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand under populist governments,” argue the paper’s authors.

Another intriguing finding of the research, though, is even with their negative impacts, these leaders tend to be good at holding on to power, remaining in power for eight years, versus shorter tenures for their more moderate equivalents.

Put simply, it is not clear that even when their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their appeal extends past mundane economics.

But returning to Buenos Aires, regardless of if Milei’s populist project fails or is sustained through foreign assistance, the Argentine people are already bearing significant costs.