Do Populist-Led Administrations Inevitably Crash the Economy?

“Cambio, cambio.” Beneath the scorching heat, scores of money changers are selling 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 congressional elections in a nation long used to saving in the US dollar.

“The best time to buy is now,” says one arbolito, refusing to provide her name. “[The dollar] dropped slightly but it’s deceptive – it’ll rise again.”

Like her, economic experts from all backgrounds anticipate a devaluation of the Argentine peso after the voting is over. The president has placed a cap on the peso to tame soaring price increases and currently it is artificially high and reserves are depleted, leaving the national economy sluggish as buyers opt for cheap imports.

Fertile Ground

The nation is a very special case. The country has frequently been racked by sovereign defaults and financial turmoil and the electorate have been susceptible for decades to leftwing populism, in the form of the powerful Peronist movement, and now the president’s conservative populism.

The president epitomizes populist leadership: captivating, iconoclastic, promising muscular measures to reclaim control of the economy from traditional elites on behalf of the people.

These key characteristics are also seen in his political partner to the north, as well as Nigel Farage, who styles himself as a pint-swilling people’s champion even though he is a public school-educated former stockbroker.

Up until lately, the president’s strategy – involving widespread sell-offs and severe public spending cuts – had earned praise from international lenders for helping to bring price rises in check. This plan shares similarities with the policies of his political hero Margaret Thatcher, who also saw rising prices as a dragon to be defeated, no matter the cost.

But financial markets began losing confidence in Milei’s radical project lately following a shaky result in local polls and a series of graft allegations. Only large-scale economic support from abroad has averted what seemed destined to be a major monetary collapse.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its leader, the former prime minister, dismissed concerns about economic detail with confident resolve to implement public demand in the face of elite opposition.

The Reform leader has so far outlined limited plans to paper except for proposals for large-scale removals, which he subsequently seemed to adjust spontaneously. He aims to rein in the Bank of England, possibly ditching its governor, Andrew Bailey, with distrust of a stodgy establishment being a key part of populist rhetoric.

His fiscal plans seem unsettled: wary of facing criticism for proposing a Liz Truss-style splurge, he recently abandoned a promise to make significant tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on public spending cuts.

Labour hopes this stance will allow it to portray the populist as intending to bring back austerity – an argument the chancellor has emphasized often, comparing it unfavorably to her approach of increasing government spending.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “The party is funded by affluent backers calling for lower taxes and reduced rules, yet also emphasizing the complaints of ordinary workers and the loss in manufacturing employment,” he says. “There’s a tension here between rich backers who want radical free-market policies, and this narrative of bringing back UK employment and industrial revival.”

Holding on to Power

In truth, the evidence suggests neither left nor right populists often perform poorly when faced with practical difficulties (although every populist leader promises distinct solutions).

A recent paper in the American Economic Review examined the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, over the long term, GDP per capita tends to be a tenth less in countries run by populist rulers than in similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” contend the paper’s authors.

A further interesting result from the study, however, 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 mainstream politicians.

In other words, 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.

But back in Buenos Aires, whether the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people are already bearing a heavy price.