Do Populist-Led Administrations Always Wreck the Economic System?

“Exchange, exchange.” Beneath the scorching heat, dozens of currency traders are hawking US dollars on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving ahead of the October 26 congressional elections in a country accustomed to holding the greenback.

“The best time for purchasing is currently,” says one arbolito, declining to give her identity. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”

Similar to her, economists across the spectrum expect a depreciation of the Argentine peso after the voting concludes. President Javier Milei has imposed a cap on the peso to tame triple-digit inflation and currently it is artificially high and foreign reserves are depleted, causing Argentina’s economy sluggish as consumers turn to low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by sovereign defaults and financial turmoil and the electorate have been susceptible for decades to leftwing populism, such as the powerful Peronist movement, and currently Milei’s conservative populism.

Milei is a textbook populist: captivating, unconventional, promising muscular policies to wrestle back command of the economy from the establishment on behalf of ordinary citizens.

These key characteristics are shared by his political partner in the United States, and by the UK politician, who styles himself as a beer-drinking people’s champion even though he is a public school-educated former stockbroker.

Until recent months, Milei’s approach – involving extensive privatisations and severe public spending cuts – had earned praise from international lenders for contributing to control price rises in check. This plan shares similarities with the policies of his political hero the former UK prime minister, who also saw inflation as a dragon to be defeated, no matter the cost.

However investors began losing confidence in the government’s agenda in recent months following a shaky result in provincial elections and a series of corruption scandals. Solely massive economic support by the US has averted what looked set to become a major monetary collapse.

Inconsistencies

The 2016 referendum several years ago likely contained similar reasoning, and its figurehead, the former prime minister, dismissed doubts about economic detail with confident resolve to implement public demand despite the establishment’s horror.

The Reform leader to date committed few policies to paper except for proposals for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to rein in the Bank of England, possibly replacing its head, Andrew Bailey, with scepticism of a stodgy establishment being a key part of the populist package.

His fiscal plans seem unsettled: concerned about facing criticism for proposing reckless spending, he recently dropped a promise to make significant tax cuts. His Reform party deputy, Richard Tice, said they would concentrate instead on reductions in government expenditure.

The opposition hopes this position will enable it to depict the populist as intending to reintroduce fiscal tightening – a point the chancellor has made repeatedly, contrasting it with her strategy of increasing public investment.

Jo Michell notes there are contradictions within the populist platform, such as it is. “Reform are bankrolled by affluent backers demanding lower taxes and deregulation, yet also emphasizing the complaints of ordinary workers and the loss in manufacturing employment,” he explains. “There is a conflict there between rich backers seeking radical free-market policies, and this story of restoring UK employment and reindustrialisation.”

Maintaining Control

In truth, 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 analysed the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, over the long term, gross domestic product per head is often 10% lower in nations governed by populist leaders compared to similar economies under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand under populist governments,” argue the researchers.

A further interesting result of the research, though, is that despite their economic costs, populist figures are often effective at retaining office, lasting on average eight years, compared with four for mainstream politicians.

In other words, it is not clear that even when their policies fail, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their appeal extends past mundane economics.

Yet back in Buenos Aires, whether Milei’s populist project collapses or is kept on life support by external aid, the Argentine people are already bearing significant costs.