Do Populist-Led Administrations Inevitably Crash the Economy?

“Dollars, dollars.” Beneath the blazing sun, scores of money changers are offering US dollars on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the 26 October 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’s deceptive – it’ll rise again.”

Similar to her, economic experts from all backgrounds expect a devaluation of the national currency after the election is over. President Javier Milei has imposed a limit on the peso to control soaring inflation and now it remains artificially high and foreign reserves are depleted, causing the national economy stagnant as consumers opt for cheap imports.

Ideal Conditions

Argentina represents a unique situation. The country has frequently been racked by sovereign defaults and economic crises and its voters have been receptive for decades to left-leaning populist movements, in the form of the influential Peronism, and now Milei’s rightwing version.

The president epitomizes populist leadership: charismatic, unconventional, promising muscular policies to wrestle back control of economic management from the establishment for the benefit of ordinary citizens.

These key characteristics are shared by his ally to the north, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man despite being a public school-educated ex-finance professional.

Up until lately, Milei’s approach – involving widespread sell-offs and deep public spending cuts – had won plaudits from the IMF for contributing to control price rises in check. The programme has something in common with that of his political hero the former UK prime minister, who similarly viewed inflation as a dragon to be defeated, no matter the cost.

However investors began losing confidence in the government’s agenda in recent months following a shaky result in local polls and a series of corruption scandals. Only large-scale financial intervention by the US has averted what looked set to become a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained some of the same logic, and its leader, Boris Johnson, dismissed doubts about economic detail with a bullish determination to enact public demand in the face of the establishment’s horror.

Farage to date committed few policies to paper except for a call for mass deportations, which he subsequently appeared to revise spontaneously. He wants to rein in the Bank of England, possibly ditching its governor, the incumbent, with distrust of a stodgy establishment being a key part of populist rhetoric.

His tax and spending policies seem unsettled: wary of facing criticism for planning reckless spending, he recently dropped a promise for significant tax reductions. His second-in-command, Richard Tice, said they would focus instead on public spending cuts.

The opposition hopes this stance will enable it to depict the populist as intending to bring back fiscal tightening – an argument Rachel Reeves has emphasized often, contrasting it with her strategy of boosting public investment.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “The party are bankrolled by very wealthy people calling for tax cuts and reduced rules, but also emphasizing the complaints of working people and the decline in manufacturing employment,” he explains. “There is a conflict here between wealthy supporters who want Thatcherism on steroids, and this narrative of restoring British jobs and reindustrialisation.”

Holding on to Power

Realistically, research indicates neither left nor right populists tend to fare well when faced with real-world challenges (although every populist leader promises something unique).

Recent research from a leading journal analysed the performance of dozens of populist leaders, from 1900 to 2020. The study revealed typically, after 15 years, GDP per capita tends to be a tenth less in countries governed by populist rulers than in comparable countries under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically go hand in hand with populist rule,” contend the researchers.

Another intriguing finding from the study, though, is despite their economic costs, populist figures are often effective at holding on to power, lasting on average eight years, versus four for their more moderate equivalents.

In other words, it remains uncertain that even when their policies fail, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past everyday financial matters.

Yet returning to Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, Argentina’s citizens are already bearing significant costs.