Do Populist Administrations Inevitably Crash the Economic System?

“Exchange, exchange.” Under the scorching heat, dozens of money changers are offering US dollars on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), their business is booming before the 26 October midterm elections in a country long used to saving in the greenback.

“The best time for purchasing is currently,” says a arbolito, refusing to provide her name. “[The dollar] went down a little but it is a fake-out – it’ll rise again.”

Similar to her, economists across the spectrum expect a devaluation of the national currency once the voting concludes. President Javier Milei has placed a limit on the peso to control triple-digit inflation and currently it remains artificially high and foreign reserves are exhausted, causing the national economy sluggish as consumers turn to cheap imports.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been hit by sovereign defaults and financial turmoil and the electorate have been receptive over the years to left-leaning populist movements, such as the influential Peronism, and now Milei’s conservative populism.

Milei epitomizes populist leadership: captivating, unconventional, vowing forceful policies to wrestle back command of economic management from the establishment on behalf of ordinary citizens.

These key characteristics are shared by his political partner in the United States, and by Nigel Farage, who styles himself as a beer-drinking champion of the common man even though he is a public school-educated former stockbroker.

Until recent months, the president’s strategy – involving widespread sell-offs and deep public spending cuts – had earned praise from the IMF for contributing to bring price rises under control. The programme shares similarities with that of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be defeated, no matter the cost.

However investors began losing confidence in the government’s agenda lately after a poor performance in local polls and multiple graft allegations. Solely massive financial intervention from abroad has prevented what seemed destined to be a major currency crisis.

Contradictions

The 2016 referendum in 2016 likely contained similar reasoning, and its leader, the former prime minister, swept away doubts about economic detail with confident resolve to implement public demand despite the establishment’s horror.

The Reform leader to date outlined limited plans in writing except for proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He aims to curb the central bank, possibly ditching its governor, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His fiscal plans appear to be in flux: concerned about being accused of planning a Liz Truss-style splurge, he lately dropped a pledge to make large tax reductions. His Reform party deputy, the party chairman, said they would concentrate instead on public spending cuts.

The opposition aims this position will allow it to portray the populist as planning to reintroduce fiscal tightening – a point the chancellor has made repeatedly, contrasting it with her strategy of increasing government spending.

Jo Michell notes there exist inconsistencies within the populist platform, such as it is. “Reform are bankrolled by very wealthy people calling for tax cuts and deregulation, yet also talking a lot about the grievances of working people and the decline of industrial jobs,” he explains. “There’s a tension there between rich backers seeking Thatcherism on steroids, and this story of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, the evidence indicates populists of any stripe tend to fare well when confronting practical difficulties (although each charismatic individual promises distinct solutions).

A recent paper from a leading journal examined the outcomes of dozens of populist leaders, over more than a century. It found typically, over the long term, gross domestic product per head tends to be a tenth less in countries governed by populist rulers compared to comparable countries with more mainstream regimes.

“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand under populist governments,” contend the researchers.

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

Put simply, it is not clear that even when their plans crash, such leaders immediately pay the price at the ballot box. Like the Brexiters’ promise to “take back control”, their appeal extends past mundane economics.

But returning to Buenos Aires, whether Milei’s populist project collapses or is sustained by external aid, Argentina’s citizens have already paid a heavy price.