Do Populist Administrations Always Crash the Economy?
“Cambio, cambio.” Beneath the scorching heat, dozens of money changers are selling American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the 26 October congressional elections in a nation long used to saving in the greenback.
“The best time for purchasing is now,” says a arbolito, declining to give her name. “[The dollar] dropped a little but it is a fake-out – it will rebound.”
Like her, economists from all backgrounds expect a depreciation of the Argentine peso after the election is over. President Javier Milei has placed a cap on the peso to control triple-digit inflation and currently it is overvalued and reserves are exhausted, leaving Argentina’s economy sluggish as buyers turn to cheap imports.
Fertile Ground
The nation is a very special case. Argentina has frequently been racked by sovereign defaults and financial turmoil and the electorate have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronism, and now Milei’s conservative populism.
The president epitomizes populist leadership: charismatic, unconventional, vowing forceful measures to reclaim control of economic management from traditional elites for the benefit of ordinary citizens.
These defining traits are also seen in his ally in the United States, as well as Nigel Farage, who styles himself as a beer-drinking people’s champion despite being a public school-educated former stockbroker.
Until recent months, Milei’s approach – involving widespread sell-offs and severe budget reductions – had earned praise from the IMF for contributing to bring inflation under control. 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 slain, regardless of the consequences.
But financial markets began losing confidence in the government’s agenda in recent months after a poor performance in provincial elections and a series of graft allegations. Only massive financial intervention from abroad has averted what looked set to become a major monetary collapse.
Contradictions
The 2016 referendum in 2016 likely contained similar reasoning, and its leader, Boris Johnson, swept away concerns regarding fiscal impacts with confident resolve to implement public demand despite the establishment’s horror.
Farage to date outlined limited plans in writing except for a call for mass deportations, which he subsequently appeared to revise on the hoof. He aims to curb the Bank of England, perhaps even ditching its governor, Andrew Bailey, with distrust of a stodgy establishment as a central element of populist rhetoric.
His fiscal plans appear to be unsettled: wary of being accused of planning reckless spending, he lately dropped a promise to make significant tax cuts. His second-in-command, Richard Tice, stated they would focus instead on reductions in government expenditure.
Labour hopes this stance will enable it to depict Farage as planning to reintroduce fiscal tightening – a point Rachel Reeves has emphasized often, comparing it unfavorably to her strategy of increasing public investment.
Jo Michell notes there are contradictions within the populist platform, as it stands. “Reform are bankrolled by affluent backers calling for tax cuts and deregulation, yet also talking a lot about the grievances of ordinary workers and the loss of industrial jobs,” he says. “There is a conflict there among rich backers who want radical free-market policies, and this narrative of bringing back British jobs and industrial revival.”
Holding on to Power
In truth, the evidence indicates neither left nor right populists often perform poorly when faced with real-world challenges (though of course each charismatic individual claims to offer distinct solutions).
Recent research from a leading journal examined the performance of dozens of populist leaders, from 1900 to 2020. The study revealed that on average, over the long term, GDP per capita is often 10% lower in nations governed by populist rulers than in similar economies under conventional leadership.
“Financial decline, weakening economic fundamentals and the decay of governance usually occur together under populist governments,” argue the researchers.
Another intriguing finding of the research, though, is even with their negative impacts, populist figures tend to be good at retaining office, remaining in power for eight years, versus four for mainstream politicians.
In other words, it is not clear that even when their policies fail, populists immediately pay the price at the ballot box. Similar to pledges made to “take back control”, their appeal reaches beyond everyday financial matters.
But back in Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support through foreign assistance, Argentina’s citizens have already paid a heavy price.
