Do Populist-Led Administrations Always Crash the Economic System?

“Exchange, exchange.” Beneath the scorching heat, dozens of currency traders are hawking US dollars on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving before the October 26 congressional elections in a country long used to saving in the greenback.

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

Similar to her, economic experts across the spectrum anticipate a devaluation of the national currency once the election is over. President Javier Milei has imposed a limit on the currency to tame soaring price increases and currently it remains artificially high and foreign reserves are depleted, leaving the national economy stagnant as buyers opt for cheap imports.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by debt defaults and financial turmoil and the electorate have been receptive for decades to leftwing populism, in the form of the influential Peronist movement, and currently Milei’s rightwing version.

Milei epitomizes populist leadership: charismatic, unconventional, promising forceful policies to wrestle back command of economic management from the establishment on behalf of ordinary citizens.

These key characteristics are also seen in his political partner to the north, as well as the UK politician, who presents himself as a pint-swilling people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, the president’s strategy – including widespread sell-offs and deep budget reductions – had won plaudits from international lenders for contributing to control inflation in check. This plan shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

However financial markets began losing confidence in the government’s agenda lately following a poor performance in local polls and a series of corruption scandals. Solely large-scale economic support by the US has prevented what seemed destined to be a full-blown currency crisis.

Inconsistencies

The vote for Brexit in 2016 likely contained some of the same logic, and its figurehead, Boris Johnson, dismissed doubts about economic detail with a bullish determination to enact the “will of the people” in the face of elite opposition.

Farage to date committed few policies in writing aside from proposals for mass deportations, that he later seemed to adjust on the hoof. He aims to rein in the central bank, possibly ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment being a key part of the populist package.

His fiscal plans seem unsettled: wary of being accused of planning a Liz Truss-style splurge, he lately abandoned a promise for large tax cuts. His second-in-command, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

Labour aims this position will allow it to depict Farage as planning to bring back austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her approach of boosting government spending.

An economics professor notes there are contradictions within the populist platform, such as it is. “The party is funded by very wealthy people calling for lower taxes and deregulation, yet also emphasizing the complaints of working people and the decline in manufacturing employment,” he says. “There is a conflict here among wealthy supporters seeking radical free-market policies, and this narrative of bringing back UK employment and reindustrialisation.”

Holding on to Power

In truth, the evidence suggests neither left nor right populists often perform poorly when faced with real-world challenges (though of course every populist leader promises something unique).

Recent research from a leading journal examined the performance of dozens of populist leaders, over more than a century. It found typically, over the long term, gross domestic product per head is often 10% lower in nations run by populist rulers than in comparable countries under conventional leadership.

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

A further interesting result from the study, however, is that despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for a considerable time, versus four for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, populists immediately pay the price in elections. Similar to pledges made to regain sovereignty, their appeal reaches beyond everyday financial matters.

But back in Buenos Aires, whether Milei’s populist project fails or is kept on life support through foreign assistance, the Argentine people have already paid significant costs.