Can Populist-Led Administrations Inevitably Wreck the Economy?

“Dollars, dollars.” Under the scorching heat, scores of currency traders are hawking US dollars on Florida Street, a bustling shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving before the October 26 congressional elections in a country accustomed to holding the US dollar.

“The optimal moment for purchasing is currently,” says a arbolito, refusing to provide her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Similar to her, economic experts from all backgrounds anticipate a depreciation of the Argentine peso once the voting is over. The president has imposed a limit on the peso to tame soaring inflation and currently it is artificially high and foreign reserves are exhausted, causing the national economy sluggish as consumers turn to low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. The country has frequently been racked by debt defaults and economic crises and its voters have been receptive over the years to left-leaning populist movements, such as the influential Peronism, and now the president’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, promising forceful measures to wrestle back command of the economy from traditional elites for the benefit of the people.

These defining traits are shared by his political partner to the north, and by Nigel Farage, who styles himself as a beer-drinking people’s champion even though he is a public school-educated ex-finance professional.

Until recent months, Milei’s approach – involving widespread sell-offs and severe budget reductions – had won plaudits from the IMF for contributing to control inflation in check. The programme shares similarities with the policies of his political hero Margaret Thatcher, who also saw rising prices as a monster to be slain, no matter the cost.

However investors began losing confidence in the government’s agenda in recent months following a shaky result in local polls and a series of graft allegations. Only massive financial intervention by the US has averted what seemed destined to be a major monetary collapse.

Inconsistencies

The 2016 referendum several years ago arguably had some of the same logic, and its figurehead, Boris Johnson, swept away concerns about economic detail with a bullish determination to implement public demand in the face of the establishment’s horror.

Farage has so far committed few policies in writing aside from a call for large-scale removals, that he later appeared to revise on the hoof. He aims to curb the Bank of England, perhaps even ditching its governor, Andrew Bailey, with scepticism toward traditional institutions being a key part of the populist package.

His tax and spending policies seem unsettled: concerned about being accused of planning reckless spending, he lately dropped a promise for significant tax cuts. His Reform party deputy, Richard Tice, stated they would concentrate instead on public spending cuts.

Labour aims this stance will enable it to portray the populist as intending to reintroduce austerity – a point Rachel Reeves has made repeatedly, contrasting it with her strategy of boosting government spending.

An economics professor says there exist inconsistencies in Farage’s economic programme, such as it is. “The party is funded by very wealthy people calling for lower taxes and reduced rules, but also emphasizing the complaints of working people and the loss in manufacturing employment,” he says. “There’s a tension here among wealthy supporters seeking radical free-market policies, and this narrative of restoring UK employment and reindustrialisation.”

Maintaining Control

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

Recent research from a leading journal analysed the outcomes of dozens of populist leaders, from 1900 to 2020. It found typically, over the long term, GDP per capita is often a tenth less in countries governed by populist leaders compared to comparable countries under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance typically occur together with populist rule,” contend the researchers.

Another intriguing finding from the study, however, is that even with their negative impacts, these leaders tend to be good at retaining office, remaining in power for a considerable time, versus four for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, populists immediately pay the price in elections. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

Yet back in Buenos Aires, regardless of if the government’s agenda collapses or is sustained through foreign assistance, the Argentine people are already bearing significant costs.