Do Populist Administrations Always Wreck the Economy?
“Dollars, dollars.” Beneath the blazing sun, scores of currency traders are selling US dollars along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 midterm elections in a country long used to saving in the greenback.
“The optimal moment for purchasing is now,” says one arbolito, refusing to provide her name. “[The dollar] went down slightly but it’s deceptive – it will rebound.”
Similar to her, economists across the spectrum anticipate a devaluation of the Argentine peso once the voting concludes. President Javier Milei has placed a cap on the peso to control triple-digit price increases and now it is artificially high and reserves are exhausted, causing the national economy stagnant as consumers turn to cheap imports.
Fertile Ground
The nation is a very special case. The country has frequently been racked by debt defaults and financial turmoil and the electorate have been susceptible over the years to leftwing populism, such as the powerful Peronist movement, and currently the president’s rightwing version.
The president is a textbook populist: captivating, iconoclastic, vowing muscular measures to wrestle back control of the economy from the establishment on behalf of ordinary citizens.
These key characteristics are shared by his ally to the north, as well as the UK politician, who presents himself as a pint-swilling 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 budget reductions – had earned praise from international lenders for helping to control price rises under control. This plan has something in common with the policies of Milei’s idol the former UK prime minister, who similarly viewed inflation as a dragon to be defeated, no matter the cost.
But investors began losing confidence in Milei’s radical project in recent months following a poor performance in provincial elections and multiple graft allegations. Solely large-scale economic support by the US has averted what seemed destined to be a major monetary collapse.
Inconsistencies
The 2016 referendum in 2016 likely contained similar reasoning, and its figurehead, the former prime minister, swept away doubts about economic detail with confident resolve to implement the “will of the people” despite elite opposition.
The Reform leader to date outlined limited plans in writing aside from a call for mass deportations, that he later appeared to revise spontaneously. He aims to curb the Bank of England, possibly replacing its head, the incumbent, with distrust toward traditional institutions as a central element of the populist package.
His tax and spending policies appear to be in flux: concerned about being accused of planning a Liz Truss-style splurge, he recently dropped a pledge for large tax cuts. His Reform party deputy, the party chairman, stated they would focus instead on reductions in government expenditure.
The opposition aims this stance will enable it to depict Farage as intending to bring back fiscal tightening – an argument the chancellor has emphasized often, contrasting it with her strategy of boosting public investment.
Jo Michell notes there exist inconsistencies in Farage’s economic programme, as it stands. “Reform is funded by affluent backers demanding tax cuts and reduced rules, but also talking a lot about the complaints of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict there between rich backers who want Thatcherism on steroids, and this story of restoring British jobs and reindustrialisation.”
Holding on to Power
In truth, research 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).
A recent paper in the American Economic Review examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, after 15 years, gross domestic product per head tends to be 10% lower in nations governed by populist leaders than in comparable countries with more mainstream regimes.
“Economic disintegration, decreasing macroeconomic stability and the erosion of institutions typically go hand in hand under populist governments,” argue the researchers.
Another intriguing finding of the research, though, is despite their economic costs, populist figures tend to be good at retaining office, lasting on average eight years, compared with four for their more moderate equivalents.
In other words, it is not clear whether even if 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.
Yet back in Buenos Aires, whether Milei’s populist project fails or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.
