Do Populist Administrations Always Crash the Economy?

“Exchange, exchange.” Beneath the scorching heat, dozens of currency traders are selling US dollars along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the October 26 midterm elections in a nation long used to saving in the US dollar.

“The best time for purchasing is now,” states a arbolito, refusing to provide her name. “[The dollar] dropped a little but it is a fake-out – it will rebound.”

Like her, economic experts across the spectrum expect a depreciation of the Argentine peso after the voting concludes. The president has imposed a cap on the peso to tame triple-digit inflation and currently it is overvalued and foreign reserves are exhausted, causing Argentina’s economy stagnant as buyers turn to cheap imports.

Ideal Conditions

The nation represents a unique situation. The country has frequently been hit by debt defaults and financial turmoil and its voters have been receptive over the years to leftwing populism, in the form of the powerful Peronism, and now the president’s rightwing version.

The president epitomizes populist leadership: captivating, unconventional, promising forceful policies to wrestle back control of economic management from traditional elites on behalf of the people.

These key characteristics are also seen in his political partner in the United States, as well as Nigel Farage, who styles himself as a beer-drinking champion of the common man despite being a privately educated former stockbroker.

Up until lately, Milei’s approach – involving extensive privatisations and severe budget reductions – had won plaudits from the IMF for contributing to control price rises under control. This plan shares similarities with the policies of Milei’s idol Margaret Thatcher, who also saw inflation as a monster to be defeated, no matter the cost.

However investors started to doubt in the government’s agenda in recent months after a poor performance in local polls and a series of graft allegations. Solely large-scale economic support by the US has averted what seemed destined to be a full-blown currency crisis.

Contradictions

The vote for Brexit in 2016 arguably had some of the same logic, and its figurehead, the former prime minister, dismissed concerns about economic detail with confident resolve to implement the “will of the people” in the face of elite opposition.

The Reform leader has so far outlined limited plans in writing except for proposals for mass deportations, that he later appeared to revise spontaneously. He aims to curb the Bank of England, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of the populist package.

His fiscal plans appear to be unsettled: concerned about facing criticism for proposing a Liz Truss-style splurge, he recently dropped a promise to make large tax cuts. His second-in-command, Richard Tice, stated they would focus instead on reductions in government expenditure.

The opposition hopes this stance will enable it to depict the populist as intending to reintroduce fiscal tightening – an argument the chancellor has made repeatedly, comparing it unfavorably to her strategy of boosting government spending.

Jo Michell says there exist inconsistencies in Farage’s economic programme, as it stands. “Reform is funded by affluent backers demanding tax cuts and reduced rules, but also talking a lot about the complaints of working people and the loss of industrial jobs,” he says. “There is a conflict there among rich backers who want radical free-market policies, and this narrative of restoring British jobs and industrial revival.”

Maintaining Control

Realistically, research indicates neither left nor right populists tend to fare well when faced with real-world challenges (although each charismatic individual claims to offer distinct solutions).

A recent paper in the American Economic Review analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, over the long term, GDP per capita is often a tenth less in countries run by populist leaders compared to comparable countries under conventional leadership.

“Economic disintegration, 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, though, is that even with their negative impacts, populist figures tend to be good at retaining office, lasting on average a considerable time, compared with four for their more moderate equivalents.

Put simply, it is not clear that even when their plans crash, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past mundane economics.

Yet back in Buenos Aires, regardless of if the government’s agenda collapses or is sustained by external aid, the Argentine people have already paid a heavy price.