Can Populist-Led Administrations Always Crash the Economy?

“Cambio, cambio.” Under the scorching heat, dozens of money changers are selling US dollars on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a nation long used to saving in the US dollar.

“The best time for purchasing is currently,” states a arbolito, declining to give her identity. “[The dollar] dropped slightly but it is a fake-out – it’ll rise again.”

Similar to her, economists across the spectrum expect a depreciation of the national currency after the voting is over. President Javier Milei has imposed a cap on the peso to tame triple-digit price increases and currently it remains artificially high and foreign reserves are exhausted, causing the national economy sluggish as buyers opt for low-cost foreign goods.

Ideal Conditions

The nation represents a unique situation. The country has been repeatedly hit by debt defaults and economic crises and its voters have been susceptible over the years to left-leaning populist movements, such as the influential Peronist movement, and currently Milei’s rightwing version.

The president epitomizes populist leadership: charismatic, unconventional, promising forceful policies to reclaim control of the economy from the establishment on behalf of ordinary citizens.

These key characteristics are shared by his ally in the United States, and by the UK politician, who styles himself as a pint-swilling champion of the common man despite being a privately educated former stockbroker.

Until recent months, the president’s strategy – involving widespread sell-offs and severe budget reductions – had earned praise from the IMF for helping to bring inflation in check. This plan shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a monster to be defeated, regardless of the consequences.

However financial markets started to doubt in the government’s agenda lately after a shaky result in local polls and multiple corruption scandals. Solely large-scale economic support by the US has prevented what looked set to become a full-blown currency crisis.

Contradictions

The 2016 referendum in 2016 arguably had some of the same logic, and its leader, Boris Johnson, dismissed concerns regarding fiscal impacts with a bullish determination to enact the “will of the people” in the face of elite opposition.

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 wants to curb the Bank of England, perhaps even replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of populist rhetoric.

His tax and spending policies seem in flux: wary of facing criticism for planning a Liz Truss-style splurge, he recently abandoned a promise to make significant tax cuts. His second-in-command, Richard Tice, said they would concentrate instead on reductions in government expenditure.

The opposition aims this position will enable it to portray the populist as intending to reintroduce fiscal tightening – an argument the chancellor has emphasized often, comparing it unfavorably to her approach of boosting government spending.

An economics professor says there are contradictions within the populist platform, as it stands. “The party are bankrolled by very wealthy people calling for tax cuts and reduced rules, but also emphasizing the grievances of working people and the loss of industrial jobs,” he says. “There is a conflict here among rich backers who want Thatcherism on steroids, and this story of bringing back British jobs and industrial revival.”

Maintaining Control

In truth, the evidence suggests neither left nor right populists tend to fare well when faced with practical difficulties (although each charismatic individual promises distinct solutions).

A recent paper in the American Economic Review analysed the outcomes of dozens of populist leaders, from 1900 to 2020. It found typically, over the long term, GDP per capita tends to be a tenth less in nations run by populist leaders than in similar economies under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance usually occur together with populist rule,” contend the researchers.

Another intriguing finding of the research, though, is despite their economic costs, these leaders tend to be good at retaining office, remaining in power for eight years, compared with shorter tenures for their more moderate equivalents.

In other words, it remains uncertain whether even if their plans crash, such leaders immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their attraction reaches beyond everyday financial matters.

But returning to Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, Argentina’s citizens have already paid a heavy price.