Do Populist-Led Administrations Always Wreck the Economic System?

“Exchange, exchange.” Beneath the scorching heat, scores of currency traders are hawking US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October midterm elections in a nation long used to holding the greenback.

“The best time to buy is now,” states a arbolito, refusing to provide her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Similar to her, economic experts across the spectrum expect a devaluation of the national currency after the election is over. The president has placed a cap on the currency to tame triple-digit inflation and now it remains overvalued and foreign reserves are exhausted, leaving Argentina’s economy stagnant as consumers opt for low-cost foreign goods.

Fertile Ground

Argentina represents a unique situation. Argentina has been repeatedly hit by sovereign defaults and financial turmoil and its voters have been receptive over the years to left-leaning populist movements, such as the influential Peronism, and now Milei’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, promising forceful measures to reclaim control of economic management from traditional elites for the benefit of the people.

These key characteristics are shared by his ally to the north, and by Nigel Farage, who presents himself as a pint-swilling champion of the common man even though he is a privately educated ex-finance professional.

Until recent months, the president’s strategy – including widespread sell-offs and severe public spending cuts – had won plaudits from the IMF for helping to bring inflation under control. The programme shares similarities with that of his political hero Margaret Thatcher, who similarly viewed inflation as a dragon to be defeated, regardless of the consequences.

But investors started to doubt in the government’s agenda in recent months after a shaky result in local polls and multiple graft allegations. Only large-scale economic support by the US has averted what looked set to become a full-blown monetary collapse.

Inconsistencies

The vote for Brexit several years ago arguably had some of the same logic, and its figurehead, the former prime minister, dismissed doubts regarding fiscal impacts with a bullish determination to implement the “will of the people” despite elite opposition.

The Reform leader has so far outlined limited plans to paper except for a call for large-scale removals, that he later seemed to adjust on the hoof. He wants to curb the central bank, possibly ditching its governor, the incumbent, with scepticism of a stodgy establishment as a central element of populist rhetoric.

His fiscal plans appear to be unsettled: concerned about being accused of planning a Liz Truss-style splurge, he lately dropped a promise for significant tax cuts. His second-in-command, Richard Tice, stated they would focus instead on reductions in government expenditure.

Labour hopes this stance will allow it to portray the populist as planning to reintroduce austerity – a point the chancellor has made repeatedly, comparing it unfavorably to her strategy of increasing public investment.

Jo Michell says there exist inconsistencies in Farage’s economic programme, such as it is. “The party is funded by very wealthy people demanding tax cuts and reduced rules, but also talking a lot about the grievances of ordinary workers and the decline in manufacturing employment,” he explains. “There is a conflict here between wealthy supporters seeking Thatcherism on steroids, and this story of bringing back British jobs and reindustrialisation.”

Holding on to Power

In truth, the evidence suggests populists of any stripe tend to fare well when faced with real-world challenges (although every populist leader claims to offer something unique).

Recent research from a leading journal analysed the performance of dozens of populist leaders, over more than a century. The study revealed typically, over the long term, GDP per capita is often a tenth less in countries run by populist leaders than in similar economies with more mainstream regimes.

“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually go hand in hand with populist rule,” contend the researchers.

Another intriguing finding from the study, however, is even with their negative impacts, these leaders tend to be good at holding on to power, lasting on average eight years, versus four for mainstream politicians.

In other words, it is not clear that even when their policies fail, populists face immediate consequences in elections. Similar to pledges made to regain sovereignty, their attraction reaches beyond mundane economics.

But back in Buenos Aires, regardless of if the government’s agenda fails or is kept on life support by external aid, Argentina’s citizens are already bearing significant costs.