Can Populist Administrations Inevitably Crash the Economy?
“Cambio, cambio.” Under the scorching heat, dozens of money changers are selling American currency on Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the October 26 congressional elections in a nation accustomed to holding the US dollar.
“The best time for purchasing is now,” says one arbolito, refusing to provide her identity. “[The dollar] went down slightly but it’s deceptive – it’ll rise again.”
Similar to her, economic experts from all backgrounds expect a devaluation of the Argentine peso once the voting is over. The president has placed a cap on the currency to tame soaring price increases and now it is artificially high and foreign reserves are depleted, causing the national economy sluggish as buyers turn to low-cost foreign goods.
Ideal Conditions
The nation represents a unique situation. The country has been repeatedly racked by debt defaults and economic crises and the electorate have been receptive for decades to leftwing populism, such as the influential Peronism, and now Milei’s rightwing version.
The president is a textbook populist: charismatic, unconventional, promising forceful measures to wrestle back control of economic management from traditional elites on behalf of the people.
These defining traits are also seen in his ally to the north, as well as Nigel Farage, who presents himself as a pint-swilling people’s champion despite being a public school-educated ex-finance professional.
Until recent months, the president’s strategy – including widespread sell-offs and deep budget reductions – had won plaudits from the IMF for helping to bring inflation in check. The programme has something in common with the policies of Milei’s idol the former UK prime minister, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.
However financial markets started to doubt in Milei’s radical project lately following a shaky result in provincial elections and multiple graft allegations. Solely massive economic support from abroad has prevented what seemed destined to be a major currency crisis.
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 to paper aside from proposals for mass deportations, that he later appeared to revise spontaneously. He aims to curb the Bank of England, perhaps even ditching its governor, the incumbent, with scepticism toward traditional institutions being a key part of populist rhetoric.
His tax and spending policies appear to be unsettled: concerned about facing criticism for planning a Liz Truss-style splurge, he lately dropped a pledge for significant tax cuts. His second-in-command, Richard Tice, stated they would focus instead on reductions in government expenditure.
Labour aims this stance will enable it to portray the populist as planning to bring back fiscal tightening – a point the chancellor has emphasized often, contrasting it with her approach of increasing public investment.
Jo Michell notes there are contradictions within the populist platform, such as it is. “Reform are bankrolled by affluent backers demanding tax cuts and deregulation, but also talking a lot about the complaints of working people and the decline of industrial jobs,” he says. “There’s a tension there between rich backers seeking radical free-market policies, and this story of restoring UK employment and industrial revival.”
Maintaining Control
Realistically, research suggests neither left nor right populists often perform poorly when faced with practical difficulties (although each charismatic individual claims to offer something unique).
Recent research from a leading journal analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, after 15 years, GDP per capita is often a tenth less in nations governed by populist rulers than in similar economies under conventional leadership.
“Financial decline, weakening economic fundamentals and the decay of governance typically go hand in hand with populist rule,” contend the researchers.
A further interesting result from the study, however, is that despite their economic costs, these leaders are often effective at holding on to power, remaining in power for eight years, versus four for mainstream politicians.
In other words, it is not clear that even when their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past mundane economics.
Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is sustained through foreign assistance, Argentina’s citizens have already paid significant costs.
