Can Populist-Led Administrations Inevitably Wreck the Economy?

“Exchange, exchange.” Beneath the scorching heat, dozens of currency traders are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a nation long used to holding the US dollar.

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

Similar to her, economists from all backgrounds anticipate a devaluation of the national currency after the voting concludes. The president has placed a limit on the currency to control triple-digit price increases and currently it remains overvalued and reserves are exhausted, causing the national economy stagnant as consumers opt for cheap imports.

Fertile Ground

Argentina is a very special case. The country has frequently been racked by sovereign defaults and financial turmoil and the electorate have been receptive for decades to leftwing populism, such as the powerful Peronist movement, and currently Milei’s rightwing version.

The president epitomizes populist leadership: captivating, unconventional, vowing muscular measures to reclaim control of the economy from the establishment for the benefit of the people.

These key characteristics are also seen in his political partner in the United States, and by the UK politician, who presents himself as a pint-swilling people’s champion even though he is a public school-educated former stockbroker.

Up until lately, the president’s strategy – involving extensive privatisations and severe public spending cuts – had won plaudits from international lenders for contributing to bring 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 rising prices as a dragon to be slain, regardless of the consequences.

However investors began losing confidence in Milei’s radical project lately following a poor performance in provincial elections and multiple graft allegations. Solely massive financial intervention by the US has prevented what seemed destined to be a major currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained some of the same logic, and its figurehead, the former prime minister, swept away doubts regarding fiscal impacts with a bullish determination to enact public demand despite the establishment’s horror.

The Reform leader has so far outlined limited plans in writing except for proposals for large-scale removals, which he subsequently appeared to revise on the hoof. He aims to rein in the Bank of England, perhaps even replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of the populist package.

His fiscal plans appear to be unsettled: wary of being accused of planning a Liz Truss-style splurge, he lately abandoned a pledge to make significant tax cuts. His Reform party deputy, Richard Tice, stated they would focus instead on reductions in government expenditure.

Labour hopes this position will enable it to portray Farage as intending to reintroduce fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of increasing government spending.

Jo Michell notes there are contradictions in Farage’s economic programme, such as it is. “The party are bankrolled by affluent backers calling for lower taxes and deregulation, but also emphasizing the complaints of working people and the loss of industrial jobs,” he explains. “There is a conflict here between rich backers who want Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

Realistically, the evidence suggests neither left nor right populists often perform poorly when faced with real-world challenges (though of course each charismatic individual promises distinct solutions).

A recent paper from a leading journal analysed the performance of dozens of populist leaders, over more than a century. The study revealed typically, over the long term, GDP per capita is often 10% lower in countries governed by populist leaders than in comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically go hand in hand with populist rule,” argue the researchers.

A further interesting result from the study, however, is that despite their economic costs, populist figures are often effective at holding on to power, remaining in power for eight years, compared with shorter tenures for their more moderate equivalents.

Put simply, it remains uncertain that even when their plans crash, populists face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past everyday financial matters.

Yet back in Buenos Aires, whether Milei’s populist project fails or is sustained by external aid, the Argentine people have already paid a heavy price.