Do Populist-Led Administrations Always Wreck the Economic System?

“Dollars, dollars.” Beneath the scorching heat, scores of currency traders are selling American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the October 26 congressional elections in a nation long used to saving in the greenback.

“The best time to buy is currently,” says one arbolito, refusing to provide her name. “[The dollar] dropped a little but it’s deceptive – it will rebound.”

Like her, economists from all backgrounds anticipate a devaluation of the Argentine peso once the election is over. The president has imposed a limit on the peso to tame triple-digit price increases and currently it remains overvalued and foreign reserves are depleted, causing Argentina’s economy sluggish as consumers opt for cheap imports.

Ideal Conditions

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

The president epitomizes populist leadership: captivating, unconventional, promising muscular policies to reclaim command of the economy from traditional elites on behalf of ordinary citizens.

These defining traits are shared by his ally in the United States, as well as the UK politician, who presents himself as a beer-drinking champion of the common man even though he is a public school-educated former stockbroker.

Up until lately, the president’s strategy – including extensive privatisations and deep public spending cuts – had won plaudits from the IMF for helping to bring inflation under control. The programme has something in common with that of Milei’s idol Margaret Thatcher, who similarly viewed inflation as a monster to be defeated, no matter the cost.

However financial markets began losing confidence in the government’s agenda lately following a poor performance in local polls and multiple corruption scandals. Only massive financial intervention from abroad has averted what looked set to become a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its leader, Boris Johnson, swept away concerns about economic detail with confident resolve to implement public demand despite elite opposition.

The Reform leader to date outlined limited plans to paper except for proposals for large-scale removals, which he subsequently seemed to adjust spontaneously. He aims to curb the Bank of England, perhaps even ditching its governor, Andrew Bailey, with distrust toward traditional institutions being a key part of the populist package.

His tax and spending policies seem unsettled: concerned about facing criticism for planning reckless spending, he recently abandoned a promise to make significant tax reductions. His Reform party deputy, Richard Tice, stated they would focus instead on public spending cuts.

The opposition aims this position will allow it to depict Farage as intending to reintroduce austerity – a point the chancellor has emphasized often, contrasting it with her strategy of increasing public investment.

An economics professor says there are contradictions within the populist platform, as it stands. “Reform is funded by affluent backers demanding tax cuts and deregulation, but also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he says. “There’s a tension there between rich backers who want radical free-market policies, and this narrative of restoring British jobs and reindustrialisation.”

Holding on to Power

In truth, the evidence indicates populists of any stripe often perform poorly when confronting practical difficulties (though of course each charismatic individual claims to offer something unique).

Recent research 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 10% lower in nations governed by populist rulers than in similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually go hand in hand with populist rule,” argue the paper’s authors.

A further interesting result from the study, though, is despite their economic costs, these leaders are often effective at retaining office, lasting on average eight years, versus 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 attraction extends past mundane economics.

Yet back in Buenos Aires, whether the government’s agenda fails or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.