Can Populist Administrations Always Crash the Economy?

“Exchange, exchange.” Beneath the blazing sun, dozens of currency traders are hawking US dollars on Florida Street, a lively pedestrian strip 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 saving in the US dollar.

“The best time to buy is now,” says a arbolito, refusing to provide her name. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”

Like her, economic experts across the spectrum expect a devaluation of the national currency once the voting is over. The president has placed a cap on the peso to tame triple-digit inflation and currently it is artificially high and foreign reserves are depleted, leaving the national economy stagnant as buyers opt for cheap imports.

Fertile Ground

The nation is a very special case. The country has frequently been racked by sovereign defaults and financial turmoil and the electorate have been receptive over the years to left-leaning populist movements, such as the powerful Peronism, and now the president’s rightwing version.

The president epitomizes populist leadership: captivating, iconoclastic, promising muscular measures to wrestle back command of economic management from traditional elites for the benefit of ordinary citizens.

These key characteristics are shared by his political partner to the north, and by Nigel Farage, who presents himself as a beer-drinking people’s champion even though he is a public school-educated former stockbroker.

Until recent months, the president’s strategy – involving extensive privatisations and deep budget reductions – had won plaudits from the IMF for helping to control inflation under control. This plan shares similarities with the policies of his political hero the former UK prime minister, who similarly viewed inflation as a monster to be slain, no matter the cost.

But financial markets began losing confidence in the government’s agenda lately following a poor performance in provincial elections and multiple graft allegations. Only large-scale economic support from abroad has averted what seemed destined to be a full-blown monetary collapse.

Contradictions

The 2016 referendum in 2016 arguably had some of the same logic, and its leader, the former prime minister, dismissed doubts about economic detail with confident resolve to enact public demand in the face of the establishment’s horror.

Farage has so far outlined limited plans in writing except for proposals for large-scale removals, that he later appeared to revise on the hoof. He wants to curb the central bank, perhaps even ditching its governor, the incumbent, with distrust of a stodgy establishment being a key part of populist rhetoric.

His fiscal plans seem unsettled: concerned about facing criticism for planning reckless spending, he recently abandoned a promise to make significant tax cuts. His second-in-command, the party chairman, stated they would concentrate instead on reductions in government expenditure.

The opposition aims this position will allow it to portray the populist as intending to reintroduce austerity – an argument Rachel Reeves has made repeatedly, contrasting it with her strategy of increasing government spending.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, such as it is. “Reform is funded by affluent backers calling for lower taxes and deregulation, yet also talking a lot about the complaints of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict there among wealthy supporters who want Thatcherism on steroids, and this narrative of bringing back UK employment and reindustrialisation.”

Maintaining Control

Realistically, research indicates populists of any stripe often perform poorly when confronting real-world challenges (although every populist leader promises something unique).

A recent paper in the American Economic Review analysed the performance of dozens of populist leaders, over more than a century. It found that on average, after 15 years, GDP per capita tends to be a tenth less in countries governed by populist leaders than in similar economies under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance usually occur together with populist rule,” contend the paper’s authors.

A further interesting result of the research, though, is that even with their negative impacts, populist figures are often effective at retaining office, remaining in power for a considerable time, versus shorter tenures for mainstream politicians.

In other words, it remains uncertain that even when their plans crash, such leaders immediately pay the price in elections. Like the Brexiters’ promise to “take back control”, their appeal reaches beyond mundane economics.

But returning to Buenos Aires, regardless of if Milei’s populist project fails or is sustained through foreign assistance, Argentina’s citizens have already paid a heavy price.