Do Populist Administrations Always Wreck the Economy?

“Cambio, cambio.” Beneath the scorching heat, scores of money changers are offering American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a nation accustomed to saving in the greenback.

“The best time to buy is currently,” states a arbolito, declining to give her identity. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Like her, economists from all backgrounds anticipate a devaluation of the national currency after the voting concludes. The president has placed a cap on the currency to control triple-digit price increases and now it remains overvalued and reserves are depleted, leaving Argentina’s economy sluggish as buyers turn to low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been racked by sovereign defaults and financial turmoil and its voters have been receptive for decades to leftwing populism, in the form of the powerful Peronist movement, and now Milei’s conservative populism.

Milei epitomizes populist leadership: captivating, iconoclastic, promising forceful measures to wrestle back command of economic management from traditional elites for the benefit of ordinary citizens.

These defining traits are shared by his political partner to the north, as well as Nigel Farage, who styles himself as a pint-swilling champion of the common man despite being a public school-educated ex-finance professional.

Until recent months, the president’s strategy – involving extensive privatisations and deep budget reductions – had won plaudits from the IMF for helping to control price rises in check. The programme has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a dragon to be slain, regardless of the consequences.

However financial markets started to doubt in the government’s agenda lately following a poor performance in provincial elections and a series of graft allegations. Only massive financial intervention from abroad has averted what seemed destined to be a major monetary collapse.

Contradictions

The 2016 referendum in 2016 arguably had similar reasoning, and its figurehead, Boris Johnson, dismissed concerns regarding fiscal impacts with confident resolve to implement the “will of the people” despite elite opposition.

The Reform leader to date outlined limited plans to paper except for a call for large-scale removals, that he later seemed to adjust on the hoof. He wants to rein in the Bank of England, possibly ditching its governor, Andrew Bailey, with distrust of a stodgy establishment being a key part of the populist package.

His tax and spending policies seem unsettled: wary of being accused of proposing a Liz Truss-style splurge, he recently dropped a pledge for large tax cuts. His Reform party deputy, the party chairman, said they would concentrate instead on reductions in government expenditure.

Labour hopes this position will allow it to depict Farage as intending to bring back austerity – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of increasing public investment.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people calling for tax cuts and deregulation, but also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he says. “There’s a tension here among rich backers who want Thatcherism on steroids, and this narrative of bringing back British jobs and industrial revival.”

Maintaining Control

Realistically, research suggests populists of any stripe tend to fare well when confronting practical difficulties (although every populist leader claims to offer something unique).

Recent research from a leading journal analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, after 15 years, gross domestic product per head tends to be 10% lower in nations governed by populist rulers compared to comparable countries under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand with populist rule,” contend the researchers.

Another intriguing finding from the study, though, is even with their negative impacts, populist figures tend to be good at retaining office, lasting on average a considerable time, compared with four for mainstream politicians.

In other words, it is not clear whether even if their policies fail, populists immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their appeal extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if Milei’s populist project fails or is sustained by external aid, Argentina’s citizens have already paid a heavy price.