Can Populist-Led Administrations Always Wreck the Economy?

“Exchange, exchange.” Beneath the scorching heat, scores of money changers are hawking American currency along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a country accustomed to holding the US dollar.

“The optimal moment to buy is currently,” says a arbolito, refusing to provide her identity. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Like her, economists across the spectrum expect a devaluation of the national currency after the voting is over. The president has placed a cap on the peso to control triple-digit price increases and now it remains overvalued and foreign reserves are depleted, leaving Argentina’s economy sluggish as buyers opt for low-cost foreign goods.

Fertile Ground

The nation represents a unique situation. Argentina has been repeatedly hit by sovereign defaults and economic crises and its voters have been receptive for decades to leftwing populism, such as the powerful Peronist movement, and currently Milei’s conservative populism.

The president epitomizes populist leadership: charismatic, unconventional, promising forceful policies to reclaim command of the economy from the establishment for the benefit of the people.

These key characteristics are also seen in his ally to the north, as well as the UK politician, who styles himself as a beer-drinking champion of the common man even though he is a privately educated former stockbroker.

Until recent months, Milei’s approach – including widespread sell-offs and deep budget reductions – had won plaudits from the IMF for contributing to control price rises under control. The programme shares similarities with that of Milei’s idol the former UK prime minister, who also saw rising prices as a monster to be defeated, no matter the cost.

However financial markets began losing confidence in Milei’s radical project lately following a poor performance in provincial elections and a series of corruption scandals. Only massive economic support from abroad has averted what seemed destined to be a major monetary collapse.

Inconsistencies

The vote for Brexit several years ago arguably had similar reasoning, and its figurehead, Boris Johnson, dismissed concerns about economic detail with confident resolve to implement public demand in the face of the establishment’s horror.

Farage has so far outlined limited plans in writing aside from a call for large-scale removals, that he later appeared to revise spontaneously. He wants to curb the central bank, perhaps even ditching its governor, Andrew Bailey, with distrust toward traditional institutions as a central element of the populist package.

His tax and spending policies seem unsettled: concerned about facing criticism for planning reckless spending, he recently abandoned a pledge to make significant tax reductions. His Reform party deputy, Richard Tice, said they would concentrate instead on public spending cuts.

The opposition aims this stance will allow it to portray the populist as planning to bring back fiscal tightening – a point Rachel Reeves has made repeatedly, contrasting it with her approach of increasing government spending.

An economics professor says there are contradictions within the populist platform, as it stands. “The party are bankrolled by affluent backers calling for lower taxes and reduced rules, but also talking a lot about the grievances of ordinary workers and the loss in manufacturing employment,” he says. “There’s a tension there between rich backers who want Thatcherism on steroids, and this narrative of bringing back British jobs and industrial revival.”

Holding on to Power

Realistically, the evidence suggests populists of any stripe often perform poorly when faced with practical difficulties (although each charismatic individual claims to offer distinct solutions).

A recent paper from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. The study revealed that on average, after 15 years, gross domestic product per head tends to be a tenth less in countries run by populist rulers than in comparable countries with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically occur together under populist governments,” argue the researchers.

Another intriguing finding from the study, though, is that despite their economic costs, populist figures tend to be good at holding on to power, remaining in power for a considerable time, versus four for mainstream politicians.

Put simply, it remains uncertain that even when their plans crash, such leaders immediately pay the price at the ballot box. Similar to pledges made to “take back control”, their appeal extends past everyday financial matters.

Yet back in Buenos Aires, whether the government’s agenda fails or is sustained by external aid, Argentina’s citizens are already bearing significant costs.