Can Populist-Led Administrations Inevitably Crash the Economic System?

“Dollars, dollars.” Beneath the blazing sun, dozens of currency traders are hawking American currency on Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), their business is booming ahead of the 26 October midterm elections in a country accustomed to saving in the greenback.

“The optimal moment for purchasing is now,” says a arbolito, declining to give her identity. “[The dollar] dropped slightly but it’s deceptive – it’ll rise again.”

Similar to her, economists across the spectrum anticipate a devaluation of the Argentine peso after the voting concludes. The president has placed a limit on the peso to tame triple-digit price increases and currently it is artificially high and foreign reserves are depleted, causing Argentina’s economy sluggish as buyers turn to cheap imports.

Fertile Ground

The nation is a very special case. Argentina has been repeatedly racked by debt defaults and economic crises and the electorate have been susceptible over the years to left-leaning populist movements, in the form of the influential Peronism, and now the president’s rightwing version.

The president is a textbook populist: charismatic, iconoclastic, promising forceful measures to wrestle back control of the economy from the establishment for the benefit of the people.

These key characteristics are also seen in his political partner to the north, as well as the UK politician, who presents himself as a pint-swilling people’s champion despite being a privately educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and deep budget reductions – had earned praise from international lenders for helping to bring price rises in check. The programme has something in common with that of Milei’s idol Margaret Thatcher, who also saw rising prices as a dragon to be defeated, regardless of the consequences.

But investors started to doubt in the government’s agenda in recent months following a shaky result in local polls and a series of corruption scandals. Solely massive financial intervention by the US has prevented what seemed destined to be a major monetary collapse.

Contradictions

The 2016 referendum in 2016 likely contained some of the same logic, and its figurehead, Boris Johnson, dismissed doubts about economic detail with a bullish determination to enact the “will of the people” in the face of the establishment’s horror.

Farage to date committed few policies in writing aside from a call for mass deportations, which he subsequently seemed to adjust on the hoof. He aims to rein in the central bank, perhaps even ditching its governor, the incumbent, with distrust of a stodgy establishment as a central element of the populist package.

His fiscal plans seem in flux: concerned about facing criticism for proposing reckless spending, he lately dropped a pledge to make significant tax reductions. His second-in-command, the party chairman, stated they would concentrate instead on reductions in government expenditure.

Labour aims this stance will enable it to portray Farage as planning to reintroduce fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting public investment.

An economics professor says there exist inconsistencies in Farage’s economic programme, as it stands. “The party are bankrolled by very wealthy people demanding lower taxes and deregulation, but also talking a lot about the complaints of working people and the loss of industrial jobs,” he says. “There is a conflict here among wealthy supporters seeking radical free-market policies, and this narrative of restoring British jobs and industrial revival.”

Maintaining Control

In truth, research suggests populists of any stripe tend to fare well when faced with real-world challenges (though of course every populist leader promises distinct solutions).

A recent paper from a leading journal examined the performance of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, after 15 years, gross domestic product per head is often a tenth less in countries governed by populist leaders compared to similar economies under conventional leadership.

“Financial decline, decreasing macroeconomic stability and the decay of governance typically go hand in hand under populist governments,” argue the paper’s authors.

A further interesting result from the study, though, is despite their economic costs, populist figures tend to be good at retaining office, lasting on average a considerable time, versus shorter tenures for mainstream politicians.

Put simply, it remains uncertain that even when their policies fail, such leaders immediately pay the price in elections. Similar to pledges made to “take back control”, their attraction reaches beyond mundane economics.

Yet back in Buenos Aires, whether Milei’s populist project collapses or is kept on life support by external aid, Argentina’s citizens have already paid significant costs.