Do Populist Administrations Always Crash the Economic System?

“Exchange, exchange.” Beneath the scorching heat, dozens of currency traders are hawking American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming ahead of the October 26 midterm elections in a country long used to holding the greenback.

“The best time for purchasing is currently,” states a arbolito, refusing to provide her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Like her, economic experts from all backgrounds expect a depreciation of the national currency once the election concludes. The president has placed a cap on the currency to tame triple-digit price increases and now it is artificially high and foreign reserves are exhausted, causing the national economy stagnant as consumers opt for low-cost foreign goods.

Fertile Ground

The nation represents a unique situation. The country has been repeatedly hit by sovereign defaults and economic crises and its voters have been receptive over the years to left-leaning populist movements, such as the influential Peronism, and now Milei’s rightwing version.

The president is a textbook populist: charismatic, unconventional, vowing muscular measures to reclaim command of economic management from traditional elites on behalf of the people.

These key characteristics 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 despite being a public school-educated ex-finance professional.

Until recent months, Milei’s approach – including extensive privatisations and deep budget reductions – had earned praise from international lenders for helping to control 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 monster to be slain, no matter the cost.

However financial markets began losing confidence in Milei’s radical project in recent months following a shaky result in local polls and a series of corruption scandals. Solely large-scale financial intervention from abroad has averted what looked set to become a full-blown currency crisis.

Inconsistencies

The 2016 referendum in 2016 arguably had similar reasoning, and its figurehead, the former prime minister, swept away concerns regarding fiscal impacts with confident resolve to implement the “will of the people” in the face of the establishment’s horror.

Farage has so far committed few policies in writing except for proposals for large-scale removals, which he subsequently appeared to revise spontaneously. He wants to rein in the central bank, perhaps even replacing its head, the incumbent, with scepticism toward traditional institutions as a central element of the populist package.

His tax and spending policies appear to be unsettled: wary of being accused of proposing a Liz Truss-style splurge, he lately abandoned a pledge to make large tax reductions. His Reform party deputy, the party chairman, stated they would concentrate instead on public spending cuts.

Labour aims this position will allow it to depict the populist as intending to reintroduce fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of increasing government spending.

Jo Michell notes there exist inconsistencies within the populist platform, as it stands. “The party is funded by affluent backers demanding tax cuts and reduced rules, yet also emphasizing the complaints of ordinary workers and the loss in manufacturing employment,” he says. “There is a conflict here among rich backers who want radical free-market policies, and this narrative of restoring British jobs and industrial revival.”

Holding on to Power

In truth, research indicates populists of any stripe tend to fare well when faced with practical difficulties (although each charismatic individual promises distinct solutions).

Recent research in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, over the long term, GDP per capita is often a tenth less in nations governed by populist leaders than in comparable countries under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually go hand in hand with populist rule,” argue the researchers.

A further interesting result from the study, however, is despite their economic costs, these leaders tend to be good at holding on to power, remaining in power for a considerable time, compared with four for mainstream politicians.

In other words, it is not clear that even when their plans crash, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their appeal extends past everyday financial matters.

But back in Buenos Aires, whether Milei’s populist project fails or is sustained through foreign assistance, Argentina’s citizens have already paid significant costs.