Do Populist-Led Administrations Always Wreck the Economy?

“Dollars, dollars.” Under the blazing sun, dozens of money changers 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 country long used to saving in the US dollar.

“The optimal moment to buy is currently,” states one arbolito, refusing to provide her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Like her, economists from all backgrounds anticipate a devaluation of the national currency after the election concludes. The president has placed a cap on the peso to control triple-digit inflation and currently it remains artificially high and foreign reserves are exhausted, leaving Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Fertile Ground

The nation is a very special case. The country has been repeatedly hit by debt defaults and economic crises and the electorate have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronist movement, and currently Milei’s rightwing version.

The president epitomizes populist leadership: charismatic, unconventional, promising muscular policies to reclaim control of economic management from the establishment on behalf of ordinary citizens.

These defining traits are shared by his ally in the United States, as well as the UK politician, who styles himself as a pint-swilling champion of the common man even though he is a privately educated former stockbroker.

Up until lately, the president’s strategy – including extensive privatisations and deep budget reductions – had earned praise from the IMF for helping to control inflation under control. The programme has something in common with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a monster to be defeated, regardless of the consequences.

But financial markets started to doubt in the government’s agenda in recent months following a shaky result in provincial elections and a series of corruption scandals. Only large-scale financial intervention by the US has averted what looked set to become a major monetary collapse.

Inconsistencies

The vote for Brexit in 2016 arguably had similar reasoning, and its figurehead, Boris Johnson, swept away doubts about economic detail with a bullish determination to implement the “will of the people” in the face of elite opposition.

The Reform leader has so far committed few policies to paper except for a call for mass deportations, that he later seemed to adjust spontaneously. He wants to rein in the central bank, possibly replacing its head, the incumbent, with scepticism of a stodgy establishment as a central element of the populist package.

His tax and spending policies seem unsettled: concerned about being accused of planning a Liz Truss-style splurge, he lately dropped a pledge to make significant tax cuts. His Reform party deputy, Richard Tice, stated they would concentrate instead on reductions in government expenditure.

The opposition hopes this stance will enable it to portray the populist as planning to reintroduce fiscal tightening – a point Rachel Reeves has made repeatedly, contrasting it with her approach of increasing government spending.

Jo Michell says there are contradictions within the populist platform, as it stands. “Reform is funded by affluent backers calling for tax cuts and reduced rules, yet also emphasizing the grievances of working people and the loss in manufacturing employment,” he says. “There is a conflict there between rich backers who want radical free-market policies, and this story of restoring UK employment and industrial revival.”

Holding on to Power

Realistically, the evidence suggests populists of any stripe tend to fare well when confronting real-world challenges (although each charismatic individual promises something unique).

A recent paper from a leading journal examined the performance of dozens of populist leaders, from 1900 to 2020. The study revealed typically, over the long term, GDP per capita tends to be a tenth less in countries governed by populist rulers than in similar economies under conventional leadership.

“Financial decline, weakening economic fundamentals and the decay of governance typically occur together under populist governments,” contend the paper’s authors.

A further interesting result of the research, though, is that despite their economic costs, populist figures tend to be good at retaining office, remaining in power for a considerable time, versus shorter tenures for their more moderate equivalents.

In other words, it is not clear that even when their policies fail, such leaders face immediate consequences at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction extends past everyday financial matters.

Yet returning to Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people are already bearing a heavy price.