Can Populist Administrations Inevitably Wreck the Economic System?

“Cambio, cambio.” Beneath the blazing sun, scores of money changers are offering American currency on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the 26 October midterm elections in a nation long used to saving in the greenback.

“The best time to buy is now,” says one arbolito, declining to give her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economists from all backgrounds anticipate a devaluation of the national currency after the election is over. The president has placed a limit on the currency to tame soaring price increases and currently it remains artificially high and reserves are depleted, leaving the national economy sluggish as buyers turn to cheap imports.

Ideal Conditions

Argentina represents a unique situation. The country has frequently been racked by sovereign defaults and financial turmoil and its voters have been susceptible for decades to leftwing populism, such as the influential Peronist movement, and now the president’s rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, promising forceful policies to wrestle back control of the economy from the establishment for the benefit of ordinary citizens.

These key characteristics are also seen in his ally to the north, as well as the UK politician, who presents himself as a beer-drinking people’s champion despite being a privately educated former stockbroker.

Up until lately, the president’s strategy – including widespread sell-offs and deep budget reductions – had won plaudits from the IMF for helping to control inflation under control. This plan shares similarities with that of Milei’s idol Margaret Thatcher, who also saw inflation as a dragon to be slain, regardless of the consequences.

However investors began losing confidence in Milei’s radical project lately following a shaky result in provincial elections and multiple corruption scandals. Only large-scale financial intervention from abroad has averted what seemed destined to be a full-blown currency crisis.

Contradictions

The vote for Brexit several years ago likely contained some of the same logic, and its figurehead, the former prime minister, swept away doubts about economic detail with confident resolve to enact the “will of the people” despite the establishment’s horror.

Farage to date committed few policies to paper aside from a call for mass deportations, which he subsequently appeared to revise on the hoof. He aims to rein in the Bank of England, perhaps even replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies seem unsettled: concerned about being accused of proposing a Liz Truss-style splurge, he lately abandoned a promise for significant tax cuts. His Reform party deputy, the party chairman, said they would focus instead on public spending cuts.

Labour aims this stance will allow it to portray the populist as intending to bring back austerity – a point the chancellor has made repeatedly, comparing it unfavorably to her approach of boosting public investment.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “The party is funded by very wealthy people calling for tax cuts and reduced rules, yet also emphasizing the complaints of ordinary workers and the loss in manufacturing employment,” he says. “There’s a tension here between rich backers who want Thatcherism on steroids, and this narrative of bringing back UK employment and reindustrialisation.”

Maintaining Control

In truth, research indicates populists of any stripe tend to fare well when faced with practical difficulties (although every populist leader promises something unique).

A recent paper from a leading journal examined the performance of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, over the long term, gross domestic product per head tends to be 10% lower in countries governed by populist leaders compared to similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually occur together with populist rule,” contend the paper’s authors.

Another intriguing finding of the research, however, is even with their negative impacts, these leaders are often effective at retaining office, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear whether even if their policies fail, populists face immediate consequences in elections. Similar to pledges made to regain sovereignty, their attraction reaches beyond 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 are already bearing significant costs.