Do Populist Administrations Inevitably Crash the Economy?

“Exchange, exchange.” Under the scorching heat, scores of currency traders are hawking US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the October 26 congressional elections in a country long used to holding the greenback.

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

Similar to her, economists from all backgrounds anticipate a devaluation of the national currency after the voting concludes. The president has imposed a cap on the currency to tame triple-digit inflation and currently it remains overvalued and reserves are exhausted, causing the national economy sluggish as buyers opt for low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. The country has been repeatedly racked by sovereign defaults and economic crises and its voters have been receptive for decades to leftwing populism, such as the powerful Peronist movement, and currently Milei’s rightwing version.

The president epitomizes populist leadership: captivating, iconoclastic, promising forceful measures to wrestle back command of economic management from traditional elites for the benefit of the people.

These key characteristics are also seen in his political partner in the United States, as well as Nigel Farage, who styles himself as a pint-swilling people’s champion even though he is a privately educated former stockbroker.

Up until lately, the president’s strategy – including widespread sell-offs and deep public spending cuts – had won plaudits from international lenders for helping to bring inflation in check. The programme shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed inflation as a monster to be slain, regardless of the consequences.

But financial markets began losing confidence in the government’s agenda lately after 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 monetary collapse.

Contradictions

The vote for Brexit in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, dismissed doubts regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of elite opposition.

The Reform leader to date outlined limited plans in writing aside from a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to curb the Bank of England, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans seem unsettled: wary of being accused of planning reckless spending, he recently dropped a promise for large tax cuts. His second-in-command, Richard Tice, said they would concentrate instead on public spending cuts.

The opposition aims this position will enable it to depict Farage as intending to reintroduce austerity – a point the chancellor has made repeatedly, comparing it unfavorably to her strategy of increasing government spending.

An economics professor says there are contradictions within the populist platform, as it stands. “Reform is funded by affluent backers calling for tax cuts and reduced rules, but also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension there among wealthy supporters who want Thatcherism on steroids, and this story of restoring British jobs and industrial revival.”

Maintaining Control

Realistically, the evidence suggests populists of any stripe often perform poorly when faced with practical difficulties (although every populist leader promises something unique).

A recent paper 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, gross domestic product per head is often a tenth less in nations run by populist leaders than in comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually occur together with populist rule,” argue the paper’s authors.

A further interesting result of the research, though, is despite their economic costs, populist figures are often effective at retaining office, remaining in power for a considerable time, versus four for their more moderate equivalents.

Put simply, it is not clear whether even if 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 back in Buenos Aires, regardless of if Milei’s populist project collapses or is sustained through foreign assistance, Argentina’s citizens have already paid significant costs.