Do Populist Administrations Inevitably Crash the Economy?
“Dollars, dollars.” Under the blazing sun, scores of money changers are selling US dollars along Florida Street, a lively shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the October 26 midterm elections in a country long used to holding the US dollar.
“The best time to buy is now,” states a arbolito, refusing to provide her identity. “[The dollar] went down a little but it’s deceptive – it’ll rise again.”
Similar to her, economists from all backgrounds anticipate a depreciation of the Argentine peso after the election concludes. President Javier Milei has placed a limit on the currency to control soaring price increases and currently it is overvalued and reserves are depleted, causing the national economy stagnant as buyers opt for low-cost foreign goods.
Ideal Conditions
The nation represents a unique situation. Argentina has frequently been racked by debt defaults and economic crises and its voters have been receptive for decades to left-leaning populist movements, in the form of the influential Peronism, and currently Milei’s rightwing version.
The president epitomizes populist leadership: captivating, iconoclastic, vowing muscular policies to reclaim command of the economy from traditional elites on behalf of ordinary citizens.
These defining traits are shared by his political partner to the north, as well as Nigel Farage, who presents himself as a pint-swilling champion of the common man despite being a privately educated ex-finance professional.
Until recent months, the president’s strategy – including widespread sell-offs and deep public spending cuts – had won plaudits from international lenders for helping to control inflation under control. This plan has something in common with that of his political hero the former UK prime minister, who also saw inflation as a dragon to be defeated, regardless of the consequences.
However investors started to doubt in the government’s agenda in recent months after a poor performance in local polls and a series of graft allegations. Only large-scale financial intervention by the US has prevented what seemed destined to be a major monetary collapse.
Contradictions
The 2016 referendum several years ago arguably had some of the same logic, and its leader, the former prime minister, dismissed doubts regarding fiscal impacts with a bullish determination to implement public demand in the face of the establishment’s horror.
The Reform leader has so far outlined limited plans to paper except for proposals for large-scale removals, that he later appeared to revise on the hoof. He wants to rein in the Bank of England, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment as a central element of populist rhetoric.
His tax and spending policies seem in flux: wary of facing criticism for planning reckless spending, he lately dropped a promise for large tax cuts. His second-in-command, the party chairman, said they would focus instead on public spending cuts.
Labour hopes this position will enable it to portray the populist as intending to reintroduce fiscal tightening – a point the chancellor has emphasized often, contrasting it with her strategy of boosting public investment.
Jo Michell notes there are contradictions within the populist platform, as it stands. “Reform are bankrolled by very wealthy people demanding lower taxes and deregulation, yet also talking a lot about the grievances of ordinary workers and the loss in manufacturing employment,” he says. “There’s a tension there between wealthy supporters seeking radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”
Holding on to Power
Realistically, research indicates populists of any stripe often perform poorly when confronting practical difficulties (although each charismatic individual promises something unique).
Recent research in the American Economic Review examined the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, after 15 years, gross domestic product per head is often a tenth less in nations run by populist rulers compared to comparable countries under conventional leadership.
“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically occur together with populist rule,” argue the researchers.
A further interesting result of the research, however, is that even with their negative impacts, populist figures are often effective at retaining office, lasting on average a considerable time, versus four for mainstream politicians.
In other words, it is not clear that even when their policies fail, populists face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal reaches beyond mundane economics.
But returning to Buenos Aires, whether the government’s agenda collapses or is sustained through foreign assistance, the Argentine people have already paid significant costs.