Can Populist Administrations Always Crash the Economic System?

“Exchange, exchange.” Under the blazing sun, dozens of money changers are offering American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the 26 October congressional elections in a nation accustomed to holding the US dollar.

“The best time for purchasing is now,” states a arbolito, refusing to provide her name. “[The dollar] dropped slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists across the spectrum expect a devaluation of the Argentine peso once the voting concludes. The president has imposed a limit on the peso to tame soaring price increases and now it is artificially high and foreign reserves are exhausted, leaving the national economy sluggish as consumers turn to low-cost foreign goods.

Ideal Conditions

Argentina is a very special case. Argentina has been repeatedly racked by sovereign defaults and financial turmoil and the electorate have been receptive over the years to leftwing populism, in the form of the influential Peronism, and now the president’s rightwing version.

Milei is a textbook populist: captivating, unconventional, vowing muscular measures to reclaim command of economic management from the establishment for the benefit of ordinary citizens.

These defining traits are shared by his ally in the United States, as well as the UK politician, who styles himself as a pint-swilling people’s champion despite being a privately educated former stockbroker.

Up until lately, Milei’s approach – involving extensive privatisations and deep budget reductions – had earned praise from the IMF for helping to bring inflation in check. This plan shares similarities with that of Milei’s idol the former UK prime minister, who also saw inflation as a monster to be defeated, no matter the cost.

However financial markets started to doubt in Milei’s radical project in recent months following a shaky result in local polls and a series of corruption scandals. Only large-scale economic support by the US has averted what looked set to become a full-blown monetary collapse.

Contradictions

The vote for Brexit several years ago likely contained similar reasoning, and its leader, Boris Johnson, dismissed doubts regarding fiscal impacts with a bullish determination to enact the “will of the people” despite the establishment’s horror.

Farage has so far committed few policies in writing aside from proposals for mass deportations, which he subsequently appeared to revise spontaneously. He wants to curb the Bank of England, perhaps even replacing its head, the incumbent, with distrust toward traditional institutions as a central element of the populist package.

His tax and spending policies seem unsettled: wary of being accused of planning reckless spending, he lately dropped a promise to make large tax reductions. His second-in-command, Richard Tice, said they would focus instead on public spending cuts.

The opposition aims this stance will enable it to portray the populist as planning to bring back austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting government spending.

An economics professor notes there exist inconsistencies within the populist platform, such as it is. “Reform are bankrolled by affluent backers demanding tax cuts and deregulation, yet also talking a lot about the grievances of working people and the loss in manufacturing employment,” he says. “There’s a tension here among wealthy supporters who want Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”

Maintaining Control

In truth, research suggests neither left nor right populists tend to fare well when confronting real-world challenges (although every populist leader claims to offer something unique).

A recent paper 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, GDP per capita tends to be 10% lower in countries governed by populist leaders than in similar economies under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand under populist governments,” argue the paper’s authors.

A further interesting result from the study, however, is despite their economic costs, these leaders tend to be good at holding on to power, lasting on average a considerable time, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear whether even if their plans crash, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their appeal reaches beyond mundane economics.

But returning to Buenos Aires, whether Milei’s populist project fails or is sustained through foreign assistance, the Argentine people have already paid significant costs.