Can Populist Administrations Inevitably Wreck the Economy?

“Dollars, dollars.” Under the blazing sun, scores of money changers are hawking American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the October 26 midterm elections in a nation long used to holding the US dollar.

“The optimal moment to buy is currently,” states a arbolito, refusing to provide her identity. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Like her, economists across the spectrum expect a devaluation of the Argentine peso after the voting concludes. The president has placed a limit on the currency to tame triple-digit inflation and now it remains overvalued and reserves are depleted, leaving 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 economic crises and the electorate have been receptive over the years to left-leaning populist movements, such as the powerful Peronist movement, and now Milei’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, vowing forceful measures to reclaim command of the economy from traditional elites on behalf of ordinary citizens.

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

Up until lately, the president’s strategy – including extensive privatisations and deep public spending cuts – had earned praise from international lenders for helping to bring inflation in check. The programme shares similarities with the policies of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.

However financial markets began losing confidence in the government’s agenda lately after a shaky result in local polls and multiple graft allegations. Only massive economic support from abroad has prevented what seemed destined to be a full-blown currency crisis.

Inconsistencies

The 2016 referendum several years ago arguably had some of the same logic, and its leader, Boris Johnson, dismissed concerns about economic detail with a bullish determination to enact public demand in the face of elite opposition.

Farage to date outlined limited plans in writing aside from proposals for mass deportations, that he later seemed to adjust on the hoof. He wants to curb the central bank, possibly ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment being a key part of populist rhetoric.

His tax and spending policies seem unsettled: wary of being accused of proposing reckless spending, he recently abandoned a pledge for large tax cuts. His Reform party deputy, the party chairman, said they would concentrate instead on public spending cuts.

The opposition aims this position will enable it to depict Farage as intending to bring back fiscal tightening – a point the chancellor has made repeatedly, contrasting it with her approach of boosting public investment.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by affluent backers demanding tax cuts and reduced rules, but also emphasizing the complaints of working people and the decline of industrial jobs,” he explains. “There is a conflict here between wealthy supporters who want radical free-market policies, and this narrative of restoring British jobs and reindustrialisation.”

Maintaining Control

In truth, research suggests populists of any stripe often perform poorly when faced with practical difficulties (although every populist leader promises something unique).

Recent research from a leading journal analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed that on average, after 15 years, GDP per capita is often 10% lower in nations run by populist rulers than in comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance usually occur together under populist governments,” argue the paper’s authors.

Another intriguing finding of the research, though, is that even with their negative impacts, populist figures tend to be good at retaining office, remaining in power for a considerable time, compared with shorter tenures for mainstream politicians.

Put simply, it remains uncertain whether even if their policies fail, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to “take back control”, their attraction extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is sustained through foreign assistance, the Argentine people have already paid a heavy price.