Can Populist Administrations Inevitably Crash the Economic System?

“Exchange, exchange.” Beneath the blazing sun, dozens of money changers are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the October 26 congressional elections in a nation long used to saving in the greenback.

“The best time for purchasing is now,” states one arbolito, declining to give her name. “[The dollar] went down slightly but it is a fake-out – it will rebound.”

Like her, economic experts from all backgrounds anticipate a depreciation of the national currency after the voting concludes. The president has placed a cap on the currency to tame triple-digit inflation and now it remains artificially high and foreign reserves are depleted, leaving the national economy stagnant as consumers opt for cheap imports.

Fertile Ground

Argentina is a very special case. Argentina has been repeatedly hit by debt defaults and financial turmoil and the electorate have been susceptible for decades to left-leaning populist movements, in the form of the influential Peronist movement, and now the president’s rightwing version.

Milei is a textbook populist: captivating, iconoclastic, vowing forceful measures to wrestle back command of the economy from the establishment on behalf of the people.

These key characteristics are shared by his political partner to the north, and by the UK politician, who styles himself as a pint-swilling people’s champion despite being a public school-educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and severe public spending cuts – had won plaudits from the IMF for helping to bring inflation under control. This plan shares similarities with that of his political hero the former UK prime minister, who also saw inflation as a dragon to be defeated, no matter the cost.

But investors began losing confidence in the government’s agenda in recent months following a shaky result in local polls and multiple corruption scandals. Only large-scale financial intervention from abroad has averted what seemed destined to be a full-blown monetary collapse.

Contradictions

The vote for Brexit in 2016 likely contained some of the same logic, and its leader, the former prime minister, swept away concerns about economic detail with a bullish determination to implement public demand despite elite opposition.

Farage to date outlined limited plans in writing aside from proposals for mass deportations, which he subsequently appeared to revise spontaneously. He aims to rein in the Bank of England, possibly ditching its governor, the incumbent, with distrust of a stodgy establishment as a central element of the populist package.

His tax and spending policies seem in flux: wary of being accused of planning a Liz Truss-style splurge, he recently abandoned a promise for significant tax reductions. His second-in-command, Richard Tice, stated they would focus instead on public spending cuts.

The opposition aims this position will allow it to portray Farage as planning to bring back austerity – a point the chancellor has emphasized often, contrasting it with her strategy of boosting public investment.

Jo Michell says there exist inconsistencies within the populist platform, as it stands. “The party is funded by affluent backers demanding lower taxes and deregulation, but also talking a lot about the complaints of ordinary workers and the decline in manufacturing employment,” he explains. “There’s a tension here among wealthy supporters who want radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, the evidence suggests neither left nor right populists tend to fare well when faced with real-world challenges (though of course every populist leader claims to offer distinct solutions).

A recent paper in the American Economic Review examined the performance of dozens of populist leaders, over more than a century. It found that on average, after 15 years, GDP per capita is often 10% lower in nations run by populist rulers compared to comparable countries under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” argue the paper’s authors.

Another intriguing finding from the study, however, is even with their negative impacts, these leaders are often effective at holding on to power, remaining in power for eight years, compared with shorter tenures for mainstream politicians.

In other words, it is not clear that even when their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their attraction extends past everyday financial matters.

But back in Buenos Aires, whether Milei’s populist project fails or is kept on life support through foreign assistance, the Argentine people have already paid significant costs.