Do Populist-Led Administrations Inevitably Wreck the Economic System?

“Cambio, cambio.” Beneath the scorching heat, dozens of money changers are selling American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the 26 October congressional elections in a nation long used to holding the US dollar.

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

Like her, economic experts from all backgrounds anticipate a depreciation of the national currency after the voting concludes. President Javier Milei has placed a limit on the peso to control soaring price increases and currently it remains overvalued and foreign reserves are exhausted, leaving the national economy stagnant as consumers opt for cheap imports.

Ideal Conditions

Argentina represents a unique situation. Argentina has been repeatedly hit by debt defaults and economic crises and the electorate have been susceptible over the years to left-leaning populist movements, such as the powerful Peronism, and now the president’s rightwing version.

Milei is a textbook populist: captivating, iconoclastic, vowing muscular policies to wrestle back command of the economy from traditional elites for the benefit of ordinary citizens.

These key characteristics are shared by his political partner in the United States, as well as Nigel Farage, who styles 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 – involving widespread sell-offs and deep budget reductions – had won plaudits from the IMF for contributing to bring inflation in check. The programme has something in common with the policies of his political hero Margaret Thatcher, who also saw inflation as a dragon to be slain, no matter the cost.

But investors began losing confidence in Milei’s radical project in recent months following a shaky result in provincial elections and multiple graft allegations. Solely large-scale financial intervention by the US has prevented what seemed destined to be a full-blown monetary collapse.

Contradictions

The vote for Brexit in 2016 likely contained some of the same logic, and its leader, the former prime minister, swept away concerns regarding fiscal impacts with confident resolve to enact the “will of the people” in the face of elite opposition.

Farage has so far outlined limited plans in writing except for proposals for mass deportations, which he subsequently appeared to revise on the hoof. He aims to rein in the Bank of England, possibly ditching its governor, Andrew Bailey, with distrust toward traditional institutions being a key part of the populist package.

His tax and spending policies seem unsettled: wary of facing criticism for proposing a Liz Truss-style splurge, he lately dropped a pledge to make significant tax reductions. His second-in-command, the party chairman, stated they would focus instead on reductions in government expenditure.

Labour hopes this stance will enable it to portray Farage as intending to bring back fiscal tightening – a point Rachel Reeves has emphasized often, comparing it unfavorably to her strategy of increasing government spending.

Jo Michell says 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 deregulation, yet also talking a lot about the complaints of ordinary workers and the decline in manufacturing employment,” he says. “There’s a tension here among wealthy supporters seeking Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests populists of any stripe tend to fare well when confronting practical difficulties (although every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review analysed the performance of dozens of populist leaders, over more than a century. The study revealed that on average, over the long term, gross domestic product per head tends to be 10% lower in nations run by populist rulers compared to similar economies under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand under populist governments,” contend the researchers.

Another intriguing finding from the study, however, is despite their economic costs, populist figures tend to be good at retaining office, remaining in power for a considerable time, versus shorter tenures for mainstream politicians.

Put simply, it is not clear whether even if their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past mundane economics.

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