Can Populist-Led Administrations Inevitably Wreck the Economic System?

“Cambio, cambio.” Beneath the scorching heat, dozens of currency traders are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a country accustomed to saving in the US dollar.

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

Similar to her, economic experts from all backgrounds anticipate a devaluation of the national currency once the election is over. The president has imposed a limit on the currency to control triple-digit inflation and currently it is artificially high and foreign reserves are depleted, causing the national economy sluggish as buyers turn to low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. The country has been repeatedly racked by debt defaults and economic crises and the electorate have been receptive over the years to left-leaning populist movements, such as the powerful Peronist movement, and now the president’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, promising muscular policies to wrestle back control of economic management from traditional elites on behalf of ordinary citizens.

These key characteristics are shared by his ally in the United States, and by the UK politician, who styles himself as a pint-swilling champion of the common man even though he is a public school-educated former stockbroker.

Until recent months, Milei’s approach – involving extensive privatisations and severe public spending cuts – had won plaudits from international lenders for helping to control inflation in check. This plan has something in common with the policies of Milei’s idol the former UK prime minister, who similarly viewed inflation as a dragon to be defeated, regardless of the consequences.

But financial markets started to doubt in the government’s agenda lately after a poor performance in local polls and multiple graft allegations. Only large-scale economic support from abroad has averted what seemed destined to be a full-blown currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained similar reasoning, and its figurehead, Boris Johnson, dismissed concerns regarding fiscal impacts with confident resolve to implement the “will of the people” in the face of elite opposition.

The Reform leader to date outlined limited plans in writing except for proposals for mass deportations, that he later seemed to adjust spontaneously. He wants to curb the Bank of England, perhaps even ditching its governor, the incumbent, with distrust of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies appear to be unsettled: concerned about being accused of proposing a Liz Truss-style splurge, he lately dropped a promise to make significant tax cuts. His Reform party deputy, the party chairman, said they would concentrate instead on public spending cuts.

The opposition aims this position will allow it to portray the populist as intending to reintroduce fiscal tightening – an argument the chancellor has emphasized often, contrasting it with her approach of boosting government spending.

An economics professor notes there exist inconsistencies within the populist platform, as it stands. “Reform is funded by very wealthy people calling for lower taxes and deregulation, yet also talking a lot about the complaints of ordinary workers and the decline in manufacturing employment,” he says. “There is a conflict there between rich backers who want Thatcherism on steroids, 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 practical difficulties (although every populist leader claims to offer something unique).

Recent research in the American Economic Review analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, after 15 years, GDP per capita is often a tenth less in nations run by populist leaders than in comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the decay of governance typically go hand in hand with populist rule,” argue the paper’s authors.

A further interesting result from the study, though, is even with their negative impacts, populist figures are often effective 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, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past mundane economics.

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