Do Populist-Led Administrations Always Crash the Economy?

“Dollars, dollars.” Beneath the blazing sun, dozens of money changers are selling American currency on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving before the October 26 midterm elections in a country long used to holding the greenback.

“The optimal moment for purchasing is now,” states a arbolito, declining to give her name. “[The dollar] went down slightly but it’s deceptive – it will rebound.”

Like her, economists from all backgrounds expect a depreciation of the Argentine peso once the voting is over. President Javier Milei has imposed a limit on the currency to control soaring inflation and currently it is artificially high and foreign reserves are depleted, causing the national economy stagnant as consumers opt for cheap imports.

Fertile Ground

The nation is a very special case. The country has frequently been hit by debt defaults and financial turmoil and its voters have been receptive for decades to left-leaning populist movements, such as the influential Peronist movement, and currently Milei’s rightwing version.

The president is a textbook populist: captivating, iconoclastic, promising forceful policies to reclaim control of economic management from traditional elites on behalf of ordinary citizens.

These defining traits are also seen in his ally in the United States, as well as the UK politician, who presents himself as a pint-swilling champion of the common man even though he is a privately educated ex-finance professional.

Until recent months, Milei’s approach – including widespread sell-offs and deep public spending cuts – had earned praise from the IMF for helping to bring inflation in check. This plan has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

But investors started to doubt in the government’s agenda lately after a shaky result in provincial elections and a series of corruption scandals. Solely massive economic support from abroad has prevented what looked set to become a major currency crisis.

Inconsistencies

The 2016 referendum several years ago arguably had some of the same logic, and its leader, Boris Johnson, dismissed doubts about economic detail with a bullish determination to enact the “will of the people” despite elite opposition.

Farage has so far committed few policies in writing aside from a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to curb the Bank of England, possibly replacing its head, the incumbent, with distrust of a stodgy establishment as a central element of the populist package.

His tax and spending policies appear to be in flux: wary of being accused of proposing reckless spending, he lately dropped a promise to make significant tax cuts. His second-in-command, Richard Tice, said they would concentrate instead on reductions in government expenditure.

Labour hopes this position will enable it to depict the populist as planning to bring back fiscal tightening – a point the chancellor has made repeatedly, contrasting it with her strategy of boosting government spending.

An economics professor notes there are contradictions within the populist platform, as it stands. “The party is funded by affluent backers demanding lower taxes and deregulation, but also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict here between wealthy supporters who want radical free-market policies, and this narrative of restoring UK employment and reindustrialisation.”

Maintaining Control

Realistically, research suggests populists of any stripe tend to fare well when faced with real-world challenges (although every populist leader promises something unique).

A recent paper from a leading journal analysed the performance of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, after 15 years, gross domestic product per head is often a tenth less in nations run by populist rulers compared to comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance typically go hand in hand under populist governments,” argue the paper’s authors.

Another intriguing finding of the research, however, is even with their negative impacts, these leaders are often effective at holding on to power, lasting on average a considerable time, versus four for mainstream politicians.

In other words, it remains uncertain whether even if their policies fail, populists face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond mundane economics.

But returning to Buenos Aires, regardless of if the government’s agenda collapses or is sustained by external aid, the Argentine people have already paid significant costs.