Do Populist Administrations Inevitably Crash the Economy?

“Cambio, cambio.” Under the scorching heat, scores of currency traders are selling American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the October 26 midterm elections in a nation accustomed to holding the US dollar.

“The optimal moment for purchasing is currently,” says one arbolito, declining to give her identity. “[The dollar] dropped slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists from all backgrounds expect a devaluation of the national currency after the voting is over. The president has imposed a cap on the currency to control soaring price increases and now it is overvalued and reserves are exhausted, causing the national economy stagnant as consumers opt for cheap imports.

Fertile Ground

Argentina is a very special case. Argentina has been repeatedly racked by debt defaults and economic crises and the electorate have been receptive over the years to left-leaning populist movements, in the form of the influential Peronist movement, and now Milei’s rightwing version.

Milei is a textbook populist: charismatic, unconventional, vowing forceful measures to wrestle back command of the economy from traditional elites for the benefit of the people.

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

Until recent months, the president’s strategy – including extensive privatisations and severe budget reductions – had earned praise from the IMF for contributing to bring inflation in check. This plan shares similarities with that of his political hero Margaret Thatcher, who also saw rising prices as a monster to be defeated, no matter the cost.

But financial markets started to doubt in the government’s agenda lately after a shaky result in local polls and multiple graft allegations. Solely large-scale economic support by the US has prevented what looked set to become a full-blown monetary collapse.

Contradictions

The vote for Brexit in 2016 arguably had some of the same logic, and its figurehead, Boris Johnson, swept away concerns about economic detail with a bullish determination to enact public demand in the face of elite opposition.

Farage has so far outlined limited plans in writing aside from a call for mass deportations, that he later appeared to revise spontaneously. He aims to rein in the Bank of England, perhaps even replacing its head, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His fiscal plans appear to be unsettled: concerned about being accused of proposing a Liz Truss-style splurge, he recently dropped a pledge to make large tax reductions. His second-in-command, the party chairman, stated they would concentrate instead on public spending cuts.

Labour hopes this position will enable it to depict the populist as intending to bring back austerity – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of boosting public investment.

Jo Michell notes there are contradictions within the populist platform, as it stands. “Reform are bankrolled by very wealthy people calling for lower taxes and deregulation, yet also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he explains. “There is a conflict here between rich backers seeking Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

Realistically, research suggests populists of any stripe often perform poorly when faced with real-world challenges (though of course every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, over the long term, GDP per capita is often a tenth less in nations run by populist leaders compared to similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the decay of governance typically occur together with populist rule,” argue the researchers.

A further interesting result from the study, though, is even with their negative impacts, populist figures are often effective at retaining office, remaining in power for eight years, compared with four for their more moderate equivalents.

Put simply, it is not clear whether even if their policies fail, such leaders immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their attraction extends past everyday financial matters.

Yet back in Buenos Aires, regardless of if Milei’s populist project fails or is sustained through foreign assistance, the Argentine people have already paid significant costs.