Do Populist Administrations Always Wreck the Economy?

“Dollars, dollars.” Beneath the blazing sun, scores of currency traders are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the 26 October midterm elections in a nation long used to saving in the greenback.

“The best time for purchasing is currently,” states one arbolito, declining to give her name. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”

Similar to her, economists from all backgrounds anticipate a depreciation of the Argentine peso once the election is over. President Javier Milei has imposed a limit on the currency to control triple-digit price increases and currently it is overvalued and foreign reserves are depleted, causing the national economy stagnant as consumers turn to low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has frequently been hit by debt defaults and financial turmoil and the electorate have been receptive over the years to left-leaning populist movements, in the form of the influential Peronist movement, and currently the president’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, vowing forceful measures to wrestle back control of economic management from the establishment on behalf of the people.

These defining traits are shared by his political partner in the United States, as well as the UK politician, who presents himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.

Up until lately, the president’s strategy – including widespread sell-offs and severe public spending cuts – had earned praise from the IMF for contributing to bring price rises in check. The programme has something in common with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a dragon to be defeated, regardless of the consequences.

But financial markets started to doubt in the government’s agenda in recent months after a poor performance in provincial elections and multiple graft allegations. Solely massive financial intervention from abroad has averted what seemed destined to be a major monetary collapse.

Inconsistencies

The vote for Brexit several years ago arguably had some of the same logic, and its leader, the former prime minister, swept away concerns regarding fiscal impacts with confident resolve to implement the “will of the people” despite elite opposition.

The Reform leader has so far outlined limited plans to paper except for proposals for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to curb the Bank of England, possibly replacing its head, Andrew Bailey, with distrust toward traditional institutions being a key part of the populist package.

His fiscal plans appear to be unsettled: concerned about facing criticism for proposing reckless spending, he recently dropped a pledge for large tax reductions. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.

The opposition hopes this position will enable it to portray Farage as planning to reintroduce austerity – a point Rachel Reeves has emphasized often, comparing it unfavorably to her approach of boosting public investment.

An economics professor notes there exist inconsistencies 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 decline in manufacturing employment,” he says. “There’s a tension there between rich backers who want Thatcherism on steroids, and this story of bringing back UK employment and industrial revival.”

Maintaining Control

Realistically, the evidence suggests neither left nor right populists 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 performance of dozens of populist leaders, over more than a century. It found that on average, over the long term, gross domestic product per head is often 10% lower in countries run by populist leaders compared to similar economies with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically go hand in hand under populist governments,” contend the researchers.

Another intriguing finding from the study, however, is that even with their negative impacts, populist figures are often effective at holding on to power, remaining in power for a considerable time, compared with four for their more moderate equivalents.

Put simply, it remains uncertain whether even if their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal reaches beyond everyday financial matters.

But returning to Buenos Aires, regardless of if the government’s agenda fails or is sustained through foreign assistance, the Argentine people have already paid significant costs.