Do Populist Administrations Always Wreck the Economy?
“Exchange, exchange.” Under the blazing sun, scores of currency traders are hawking US dollars on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming ahead of the 26 October midterm elections in a country long used to saving in the US dollar.
“The optimal moment for purchasing is currently,” says a arbolito, refusing to provide her name. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”
Similar to her, economic experts across the spectrum expect a depreciation of the Argentine peso once the voting is over. The president has imposed a cap on the peso to tame triple-digit price increases and currently it is overvalued and foreign reserves are exhausted, causing Argentina’s economy stagnant as buyers opt for low-cost foreign goods.
Ideal Conditions
Argentina represents a unique situation. The country has frequently been racked by sovereign defaults and economic crises and the electorate have been susceptible over the years to left-leaning populist movements, such as the influential Peronist movement, and currently Milei’s rightwing version.
The president epitomizes populist leadership: captivating, unconventional, vowing forceful policies to wrestle back command of economic management from the establishment on behalf of the people.
These defining traits are shared by his ally to the north, and by Nigel Farage, who styles himself as a pint-swilling people’s champion despite being a public school-educated ex-finance professional.
Until recent months, Milei’s approach – including extensive privatisations and deep budget reductions – had earned praise from international lenders for contributing to bring inflation under control. This plan shares similarities with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.
But investors started to doubt in Milei’s radical project lately after a poor performance in local polls and a series of graft allegations. Solely massive financial intervention from abroad has prevented what looked set to become a full-blown monetary collapse.
Contradictions
The vote for Brexit in 2016 likely contained similar reasoning, and its figurehead, the former prime minister, swept away doubts about economic detail with a bullish determination to enact the “will of the people” despite the establishment’s horror.
Farage has so far outlined limited plans in writing except for a call for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to rein in the central bank, perhaps even replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of populist rhetoric.
His fiscal plans appear to be unsettled: concerned about being accused of proposing reckless spending, he lately abandoned a promise for significant tax reductions. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.
Labour hopes this stance will allow it to depict the populist as planning to bring back austerity – an argument the chancellor has made repeatedly, contrasting it with her approach of boosting government spending.
An economics professor says there are contradictions within the populist platform, as it stands. “The party is funded by affluent backers demanding lower taxes and deregulation, but also talking a lot about the complaints of working people and the decline in manufacturing employment,” he says. “There is a conflict here among rich backers seeking Thatcherism on steroids, and this narrative of bringing back UK employment and reindustrialisation.”
Holding on to Power
Realistically, the evidence indicates populists of any stripe tend to fare well when faced with real-world challenges (though of course every populist leader promises distinct solutions).
Recent research in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. It found that on average, after 15 years, gross domestic product per head is often a tenth less in countries governed by populist leaders compared to similar economies with more mainstream regimes.
“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand under populist governments,” contend the researchers.
Another intriguing finding of the research, though, is that despite their economic costs, these leaders are often effective at holding on to power, lasting on average eight years, compared with four for their more moderate equivalents.
Put simply, it is not clear whether even if their plans crash, such leaders immediately pay the price at the ballot box. Similar to pledges made to “take back control”, their appeal reaches beyond mundane economics.
Yet returning to Buenos Aires, whether Milei’s populist project collapses or is sustained by external aid, Argentina’s citizens have already paid significant costs.
