Can Populist Administrations Inevitably Crash the Economic System?

“Cambio, cambio.” Beneath the scorching heat, dozens of money changers are offering US dollars on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the 26 October congressional elections in a nation accustomed to saving in the greenback.

“The optimal moment to buy is now,” says a arbolito, refusing to provide her identity. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”

Like her, economists from all backgrounds anticipate a devaluation of the national currency once the voting concludes. President Javier Milei has placed a cap on the currency to tame soaring inflation and now it remains overvalued and reserves are depleted, causing Argentina’s economy sluggish as buyers turn to cheap imports.

Ideal Conditions

Argentina represents a unique situation. The country has frequently been hit by sovereign defaults and economic crises and its voters have been susceptible for decades to left-leaning populist movements, such as the influential Peronist movement, and currently the president’s rightwing version.

The president is a textbook populist: charismatic, unconventional, promising forceful measures to wrestle back control of economic management from traditional elites on behalf of ordinary citizens.

These defining traits are also seen in his political partner to the north, as well as the UK politician, who styles himself as a pint-swilling champion of the common man despite being a public school-educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and severe budget reductions – had won plaudits from the IMF for contributing to bring price rises under control. This plan shares similarities with the policies of his political hero the former UK prime minister, who also saw rising prices as a monster to be defeated, regardless of the consequences.

However financial markets started to doubt in Milei’s radical project in recent months after a poor performance in local polls and a series of corruption scandals. Solely massive financial intervention from abroad has prevented what seemed destined to be a major monetary collapse.

Contradictions

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, the former prime minister, dismissed doubts regarding fiscal impacts with a bullish determination to implement public demand in the face of elite opposition.

Farage has so far outlined limited plans to paper except for proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He aims to curb the Bank of England, perhaps even replacing its head, the incumbent, with distrust of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans appear to be in flux: concerned about facing criticism for proposing reckless spending, he recently dropped a promise to make large tax cuts. His Reform party deputy, the party chairman, stated they would concentrate instead on public spending cuts.

Labour aims this position will allow it to depict the populist as intending to reintroduce fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of increasing government spending.

An economics professor says there are contradictions in Farage’s economic programme, as it stands. “The party is funded by affluent backers demanding lower taxes and deregulation, but also talking a lot about the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict here among rich backers who want radical free-market policies, and this narrative of bringing back British jobs and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists tend to fare well when faced with real-world challenges (although every populist leader promises something unique).

A recent paper in the American Economic Review examined the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, over the long term, GDP per capita is often 10% lower in countries governed by populist leaders than in similar economies under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the decay of governance typically go hand in hand under populist governments,” contend the paper’s authors.

Another intriguing finding of the research, however, is despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for eight years, compared with four for their more moderate equivalents.

Put simply, it is not clear that even when their policies fail, populists face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their appeal extends past everyday financial matters.

But returning to Buenos Aires, whether Milei’s populist project fails or is sustained through foreign assistance, Argentina’s citizens have already paid a heavy price.