Can Populist Administrations Always Crash the Economy?

“Cambio, cambio.” Under the blazing sun, dozens of currency traders are offering American currency on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the October 26 midterm elections in a nation accustomed to saving in the greenback.

“The optimal moment to buy is now,” states one arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it is a fake-out – it’ll rise again.”

Like her, economic experts across the spectrum expect a depreciation of the Argentine peso after the voting concludes. President Javier Milei has placed a limit on the currency to tame triple-digit price increases and now it remains overvalued and foreign reserves are depleted, causing the national economy sluggish as buyers turn to cheap imports.

Fertile Ground

Argentina is a very special case. Argentina has frequently been racked by sovereign defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, such as the influential Peronist movement, and currently Milei’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, vowing forceful measures to wrestle back control of economic management from the establishment on behalf of the people.

These key characteristics are also seen in his ally to the north, and by Nigel Farage, who presents himself as a pint-swilling champion of the common man despite being a public school-educated former stockbroker.

Until recent months, the president’s strategy – including widespread sell-offs and severe budget reductions – had won plaudits from the IMF for helping to bring inflation under control. This plan shares similarities with that of his political hero Margaret Thatcher, who similarly viewed rising prices as a dragon to be slain, regardless of the consequences.

However investors started to doubt in Milei’s radical project in recent months following a shaky result in provincial elections and multiple graft allegations. Solely large-scale financial intervention from abroad has prevented what looked set to become a full-blown monetary collapse.

Contradictions

The 2016 referendum several years ago arguably had similar reasoning, and its leader, Boris Johnson, dismissed doubts about economic detail with a bullish determination to enact the “will of the people” in the face of the establishment’s horror.

Farage to date outlined limited plans in writing except for a call for large-scale removals, that he later appeared to revise spontaneously. He aims to rein in the Bank of England, possibly replacing its head, Andrew Bailey, with distrust toward traditional institutions being a key part of populist rhetoric.

His fiscal plans appear to be unsettled: concerned about being accused of proposing a Liz Truss-style splurge, he lately dropped a promise for significant tax cuts. His second-in-command, the party chairman, stated they would concentrate instead on public spending cuts.

The opposition aims this stance will enable it to portray the populist as intending to bring back fiscal tightening – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of increasing government spending.

An economics professor says there are contradictions in Farage’s economic programme, as it stands. “The party is funded by very wealthy people demanding lower taxes and deregulation, yet also emphasizing the complaints of ordinary workers and the decline in manufacturing employment,” he explains. “There’s a tension here among wealthy supporters who want Thatcherism on steroids, and this narrative of restoring British jobs and reindustrialisation.”

Holding on to Power

Realistically, research indicates populists of any stripe tend to fare well when confronting real-world challenges (though of course every populist leader promises something unique).

A recent paper from a leading journal examined the performance of dozens of populist leaders, from 1900 to 2020. It found that on average, over the long term, GDP per capita is often a tenth less in countries run by populist leaders than in similar economies under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance typically occur together with populist rule,” argue the researchers.

Another intriguing finding from the study, however, is even with their negative impacts, populist figures are often effective at holding on to power, remaining in power for a considerable time, versus four for mainstream politicians.

In other words, it remains uncertain whether even if their policies fail, such leaders face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their attraction extends past 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 have already paid a heavy price.