Do Populist Administrations Always Wreck the Economic System?

“Exchange, exchange.” Under the scorching heat, dozens of currency traders are offering American currency on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the 26 October midterm elections in a country accustomed to holding the US dollar.

“The optimal moment for purchasing is currently,” states a arbolito, declining to give her identity. “[The dollar] went down slightly but it is a fake-out – it’ll rise again.”

Similar to her, economic experts from all backgrounds expect a depreciation of the national currency after the voting concludes. The president has imposed a limit on the currency to tame soaring inflation and now it remains overvalued and reserves are depleted, causing Argentina’s economy stagnant as buyers turn to cheap imports.

Fertile Ground

Argentina represents a unique situation. The country has been repeatedly racked by sovereign defaults and economic crises and the electorate have been receptive for decades to leftwing populism, such as the influential Peronist movement, and currently the president’s conservative populism.

Milei epitomizes populist leadership: charismatic, unconventional, promising muscular policies to wrestle back command of the economy from the establishment for the benefit of the people.

These defining traits are shared by his political partner in the United States, and by the UK politician, who presents himself as a pint-swilling people’s champion despite being a public school-educated former stockbroker.

Up until lately, Milei’s approach – including extensive privatisations and severe budget reductions – had won plaudits from the IMF for helping to bring inflation under control. This plan has something in common with that of his political hero the former UK prime minister, who also saw inflation as a monster to be slain, no matter the cost.

However financial markets started to doubt in Milei’s radical project in recent months after a poor performance in provincial elections and multiple graft allegations. Only large-scale economic support by the US has prevented what seemed destined to be a major currency crisis.

Contradictions

The vote for Brexit several years ago arguably had similar reasoning, and its leader, the former prime minister, dismissed doubts regarding fiscal impacts with confident resolve to enact the “will of the people” despite the establishment’s horror.

The Reform leader to date outlined limited plans in writing aside from proposals for mass deportations, that he later appeared to revise spontaneously. He wants to curb the Bank of England, perhaps even replacing its head, Andrew Bailey, with distrust toward traditional institutions being a key part of populist rhetoric.

His tax and spending policies seem in flux: wary of being accused of proposing a Liz Truss-style splurge, he lately abandoned a pledge to make large tax cuts. His second-in-command, Richard Tice, said they would concentrate instead on public spending cuts.

The opposition hopes this stance will enable it to depict the populist as intending to bring back fiscal tightening – a point Rachel Reeves has emphasized often, contrasting it with her strategy of boosting government spending.

An economics professor says there are contradictions within the populist platform, such as it is. “The party is funded by very wealthy people calling for lower taxes and deregulation, but also emphasizing the grievances of ordinary workers and the decline of industrial jobs,” he says. “There’s a tension there among rich backers who want radical free-market policies, and this story of restoring UK employment and industrial revival.”

Holding on to Power

In truth, research suggests neither left nor right populists often perform poorly when faced with real-world challenges (although every populist leader promises something unique).

Recent research in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed typically, after 15 years, gross domestic product per head tends to be a tenth less in countries run by populist leaders than in similar economies with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance usually occur together with populist rule,” contend the paper’s authors.

Another intriguing finding from the study, though, is that despite their economic costs, populist figures are often effective at retaining office, lasting on average a considerable time, compared with four for mainstream politicians.

Put simply, it remains uncertain whether even if their plans crash, populists face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their appeal extends past mundane economics.

Yet returning to Buenos Aires, regardless of if Milei’s populist project fails or is kept on life support by external aid, the Argentine people are already bearing a heavy price.