Can Populist-Led Administrations Inevitably Wreck the Economic System?

“Exchange, exchange.” Under the scorching heat, scores of currency traders are offering American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the October 26 congressional elections in a nation accustomed to holding the US dollar.

“The optimal moment for purchasing is currently,” says a arbolito, refusing to provide her identity. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Similar to her, economists from all backgrounds anticipate a depreciation of the Argentine peso after the voting is over. President Javier Milei has placed a limit on the peso to tame triple-digit inflation and now it is artificially high and reserves are depleted, leaving the national economy sluggish as buyers turn to low-cost foreign goods.

Ideal Conditions

Argentina is a very special case. Argentina has frequently been racked by debt defaults and financial turmoil and the electorate have been receptive for decades to leftwing populism, in the form of the powerful Peronism, and now the president’s rightwing version.

Milei is a textbook populist: charismatic, iconoclastic, promising muscular measures to wrestle back command of economic management from the establishment on behalf of the people.

These defining traits are also seen in his political partner to the north, as well as the UK politician, who styles himself as a pint-swilling champion of the common man even though he is a public school-educated ex-finance professional.

Up until lately, Milei’s approach – including extensive privatisations and severe public spending cuts – had won plaudits from international lenders for contributing to bring price rises in check. The programme has something in common with the policies of Milei’s idol the former UK prime minister, who similarly viewed inflation as a monster to be defeated, no matter the cost.

However investors started to doubt in Milei’s radical project lately after a poor performance in local polls and multiple corruption scandals. Only massive economic support from abroad has averted what looked set to become a major currency crisis.

Contradictions

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, Boris Johnson, dismissed doubts regarding fiscal impacts with a bullish determination to enact the “will of the people” despite the establishment’s horror.

The Reform leader has so far committed few policies to paper aside from proposals for mass deportations, which he subsequently appeared to revise on the hoof. He aims to curb the Bank of England, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions as a central element of the populist package.

His fiscal plans appear to be in flux: concerned about being accused of proposing reckless spending, he lately dropped a pledge to make large tax reductions. His Reform party deputy, Richard Tice, said they would concentrate instead on public spending cuts.

Labour hopes this stance will enable it to depict Farage as planning to bring back austerity – a point Rachel Reeves has made repeatedly, contrasting it with her strategy of increasing government spending.

An economics professor says there exist inconsistencies in Farage’s economic programme, such as it is. “Reform is funded by very wealthy people calling for lower taxes and deregulation, yet also talking a lot about the complaints of ordinary workers and the loss in manufacturing employment,” he says. “There’s a tension there among rich backers seeking Thatcherism on steroids, and this narrative of bringing back British jobs and industrial revival.”

Maintaining Control

In truth, research suggests neither left nor right populists often perform poorly when confronting real-world challenges (although each charismatic individual promises something unique).

A recent paper in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, over more than a century. The study revealed that on average, after 15 years, gross domestic product per head tends to be 10% lower in nations run by populist rulers compared to comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the decay of governance usually occur together with populist rule,” contend the researchers.

Another intriguing finding from the study, though, is that even with their negative impacts, these leaders tend to be good at holding on to power, lasting on average eight years, versus four for mainstream politicians.

Put simply, it remains uncertain whether even if their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their appeal reaches beyond everyday financial matters.

Yet back in Buenos Aires, whether Milei’s populist project fails or is sustained through foreign assistance, the Argentine people are already bearing a heavy price.