Can Populist-Led Administrations Inevitably Wreck the Economy?

“Exchange, exchange.” Under the blazing sun, scores of currency traders are selling American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“small trees”), their business is booming before the 26 October congressional elections in a country accustomed to saving in the greenback.

“The best time for purchasing is now,” states a arbolito, declining to give her identity. “[The dollar] went down a little but it’s deceptive – it will rebound.”

Similar to her, economists from all backgrounds expect a depreciation of the Argentine peso once the election is over. President Javier Milei has imposed a cap on the currency to control triple-digit inflation and now it is overvalued and reserves are depleted, causing Argentina’s economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. The country has been repeatedly hit by debt defaults and financial turmoil and its voters have been susceptible over the years to left-leaning populist movements, in the form of the powerful Peronism, and currently Milei’s conservative populism.

Milei is a textbook populist: captivating, unconventional, vowing forceful policies to wrestle back command of the economy from the establishment on behalf of ordinary citizens.

These defining traits are shared by his ally in the United States, as well as the UK politician, who styles himself as a pint-swilling people’s champion even though he is a privately educated former stockbroker.

Until recent months, Milei’s approach – including widespread sell-offs and severe budget reductions – had earned praise from the IMF for contributing to bring inflation under control. This plan shares similarities with that of Milei’s idol Margaret Thatcher, who also saw inflation as a dragon to be defeated, regardless of the consequences.

But financial markets began losing confidence in the government’s agenda in recent months following a poor performance in provincial elections and multiple corruption scandals. Solely large-scale economic support by the US has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum several years ago arguably had similar reasoning, and its leader, the former prime minister, swept away concerns about economic detail with confident resolve to enact the “will of the people” in the face of the establishment’s horror.

The Reform leader to date outlined limited plans to paper except for a call for mass deportations, that he later seemed to adjust spontaneously. He aims to rein in the central bank, possibly replacing its head, Andrew Bailey, with distrust toward traditional institutions as a central element of the populist package.

His tax and spending policies appear to be in flux: concerned about facing criticism for proposing reckless spending, he lately abandoned a pledge for large tax cuts. His Reform party deputy, the party chairman, stated they would focus instead on public spending cuts.

The opposition aims this position will allow it to portray the populist as planning to bring back austerity – a point the chancellor has emphasized often, contrasting it with her approach of increasing public investment.

Jo Michell says there are contradictions within the populist platform, as it stands. “The party is funded by very wealthy people demanding lower taxes and reduced rules, but also talking a lot about the complaints of ordinary workers and the decline in manufacturing employment,” he says. “There is a conflict here between rich backers who want radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”

Holding on to Power

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

A recent paper from a leading journal examined the outcomes of dozens of populist leaders, over more than a century. It found that on average, after 15 years, gross domestic product per head is often a tenth less in nations run by populist leaders than in comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the decay of governance typically occur together with populist rule,” argue the researchers.

Another intriguing finding of the research, however, is that despite their economic costs, these leaders tend to be good at retaining office, remaining in power for a considerable time, compared with four for mainstream politicians.

Put simply, it remains uncertain whether even if their policies fail, such leaders face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their attraction extends past mundane economics.

Yet returning to Buenos Aires, regardless of if Milei’s populist project collapses or is sustained by external aid, Argentina’s citizens have already paid a heavy price.