Do Populist Administrations Always Wreck the Economy?

“Dollars, dollars.” Under the blazing sun, dozens of currency traders are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the October 26 congressional elections in a country accustomed to holding the greenback.

“The best time to buy is now,” states one arbolito, declining to give her identity. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Similar to her, economic experts across the spectrum expect a depreciation of the Argentine peso after the voting is over. President Javier Milei has imposed a limit on the peso to control soaring inflation and currently it remains artificially high and reserves are depleted, causing Argentina’s economy stagnant as buyers turn to cheap imports.

Fertile Ground

Argentina is a very special case. Argentina has frequently been hit by sovereign defaults and economic crises and its voters have been receptive over the years to leftwing populism, in the form of the influential Peronist movement, and currently Milei’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, promising muscular measures to reclaim command of economic management from traditional elites for the benefit of the people.

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

Until recent months, the president’s strategy – involving widespread sell-offs and deep public spending cuts – had won plaudits from the IMF for contributing to control inflation in check. The programme has something in common with that of Milei’s idol Margaret Thatcher, who also saw inflation as a dragon to be slain, no matter the cost.

But financial markets started to doubt in Milei’s radical project lately after a shaky result in local polls and a series of corruption scandals. Only large-scale economic support from abroad has prevented what seemed destined to be a full-blown currency crisis.

Contradictions

The 2016 referendum several years ago arguably had similar reasoning, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to enact public demand despite the establishment’s horror.

The Reform leader to date committed few policies in writing except for a call for large-scale removals, which he subsequently seemed to adjust on the hoof. He wants to rein in the central bank, possibly replacing its head, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His tax and spending policies seem in flux: wary of facing criticism for proposing a Liz Truss-style splurge, he lately abandoned a promise to make significant tax reductions. His second-in-command, the party chairman, said they would concentrate instead on reductions in government expenditure.

The opposition aims this position will allow it to depict the populist as planning to reintroduce fiscal tightening – a point the chancellor has made repeatedly, contrasting it with her strategy of increasing government spending.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by very wealthy people demanding tax cuts and deregulation, but also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he says. “There’s a tension here between wealthy supporters who want radical free-market policies, and this story of restoring British jobs and industrial revival.”

Holding on to Power

In truth, the evidence indicates neither left nor right populists often perform poorly when confronting practical difficulties (though of course every populist leader promises something unique).

Recent research in the American Economic Review analysed the outcomes of dozens of populist leaders, over more than a century. The study revealed typically, after 15 years, GDP per capita tends to be 10% lower in countries run by populist leaders than in comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance typically occur together under populist governments,” contend the researchers.

Another intriguing finding from the study, however, is even with their negative impacts, populist figures are often effective at retaining office, lasting on average a considerable time, compared with four for their more moderate equivalents.

Put simply, it remains uncertain whether even if their policies fail, such leaders face immediate consequences in elections. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

But back in Buenos Aires, regardless of if the government’s agenda fails or is kept on life support by external aid, the Argentine people have already paid a heavy price.