Do Populist Administrations Always Crash the Economy?
“Exchange, exchange.” Under the blazing sun, scores of currency traders are hawking US dollars along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming before the 26 October congressional elections in a country accustomed to holding the greenback.
“The best time for purchasing is currently,” says a arbolito, refusing to provide her name. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”
Like her, economic experts from all backgrounds anticipate a depreciation of the national currency after the voting is over. The president has placed a limit on the currency to control triple-digit inflation and now it remains artificially high and reserves are depleted, leaving Argentina’s economy stagnant as consumers opt for cheap imports.
Ideal Conditions
Argentina represents a unique situation. Argentina has frequently been hit by sovereign defaults and economic crises and the electorate have been receptive over the years to leftwing populism, in the form of the powerful Peronist movement, and now Milei’s rightwing version.
The president is a textbook populist: captivating, iconoclastic, vowing muscular measures to wrestle back command of the economy from traditional elites on behalf of the people.
These key characteristics are shared by his political partner in the United States, as well as the UK politician, who styles himself as a pint-swilling champion of the common man even though he is a privately educated former stockbroker.
Up until lately, Milei’s approach – including widespread sell-offs and severe budget reductions – had earned praise from international lenders for helping to control price rises under control. The programme has something in common with the policies of his political hero Margaret Thatcher, who also saw rising prices as a monster to be slain, regardless of the consequences.
But financial markets started to doubt in Milei’s radical project lately after a poor performance in provincial elections and multiple corruption scandals. Only massive economic support from abroad has averted what seemed destined to be a major monetary collapse.
Inconsistencies
The vote for Brexit in 2016 arguably had some of the same logic, and its figurehead, the former prime minister, swept away doubts about economic detail with confident resolve to enact public demand in the face of the establishment’s horror.
Farage has so far committed few policies to paper aside from proposals for large-scale removals, which he subsequently appeared to revise spontaneously. He wants to curb the central bank, perhaps even ditching its governor, the incumbent, with scepticism toward traditional institutions as a central element of populist rhetoric.
His tax and spending policies appear to be in flux: wary of being accused of proposing a Liz Truss-style splurge, he recently dropped a pledge for large tax cuts. His Reform party deputy, the party chairman, said they would focus instead on reductions in government expenditure.
Labour aims this position will enable it to depict Farage as planning to bring back austerity – an argument the chancellor has made repeatedly, contrasting it with her approach of increasing government spending.
Jo Michell says there are contradictions in Farage’s economic programme, as it stands. “The party are bankrolled by affluent backers calling for lower taxes and deregulation, yet also emphasizing the grievances of working people and the decline in manufacturing employment,” he says. “There’s a tension here among wealthy supporters seeking Thatcherism on steroids, and this narrative of bringing back British jobs and reindustrialisation.”
Maintaining Control
In truth, research suggests populists of any stripe often perform poorly when confronting practical difficulties (though of course every populist leader promises distinct solutions).
Recent research in the American Economic Review analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed that on average, over the long term, GDP per capita tends to be 10% lower in countries governed by populist leaders compared to similar economies with more mainstream regimes.
“Economic disintegration, weakening economic fundamentals and the decay of governance usually occur together under populist governments,” contend the paper’s authors.
Another intriguing finding from the study, though, is even with their negative impacts, these leaders tend to be good at retaining office, lasting on average a considerable time, versus four for their more moderate equivalents.
In other words, it remains uncertain that even when their policies fail, populists immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction extends past everyday financial matters.
Yet returning to Buenos Aires, whether Milei’s populist project fails or is kept on life support through foreign assistance, Argentina’s citizens have already paid a heavy price.
