Can Populist Administrations Inevitably Wreck the Economic System?
“Dollars, dollars.” Beneath the blazing sun, dozens of currency traders are hawking US dollars along Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), their business is booming ahead of the October 26 midterm elections in a country long used to saving in the greenback.
“The optimal moment to buy is currently,” says one arbolito, declining to give her identity. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”
Like her, economists across the spectrum expect a devaluation of the Argentine peso once the election concludes. President Javier Milei has imposed a limit on the peso to control soaring price increases and now it is artificially high and reserves are exhausted, causing the national economy sluggish as buyers opt for cheap imports.
Fertile Ground
Argentina represents a unique situation. The country has frequently been hit by debt defaults and financial turmoil and its voters have been receptive for decades to left-leaning populist movements, in the form of the influential Peronism, and now Milei’s conservative populism.
The president epitomizes populist leadership: charismatic, iconoclastic, promising forceful policies to reclaim command of economic management from the establishment for the benefit of the people.
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 despite being a privately educated former stockbroker.
Up until lately, Milei’s approach – involving extensive privatisations and deep public spending cuts – had won plaudits from international lenders for contributing to control price rises in check. This plan has something in common with the policies of Milei’s idol the former UK prime minister, who similarly viewed rising prices as a monster to be slain, no matter the cost.
But investors began losing confidence in Milei’s radical project lately following a shaky result in local polls and a series of corruption scandals. Solely large-scale financial intervention by the US has prevented what looked set to become a full-blown monetary collapse.
Inconsistencies
The vote for Brexit several years ago likely contained some of the same logic, and its leader, the former prime minister, dismissed concerns regarding fiscal impacts with a bullish determination to enact the “will of the people” in the face of elite opposition.
The Reform leader to date committed few policies to paper aside from proposals for mass deportations, which he subsequently seemed to adjust spontaneously. He aims to curb the central bank, perhaps even ditching its governor, the incumbent, with scepticism toward traditional institutions as a central element of the populist package.
His fiscal plans seem in flux: wary of being accused of proposing reckless spending, he lately abandoned a pledge to make significant tax cuts. His second-in-command, the party chairman, said they would focus instead on reductions in government expenditure.
Labour hopes this stance will enable it to depict the populist as intending to bring back fiscal tightening – an argument the chancellor has emphasized often, comparing it unfavorably to her approach of increasing public investment.
Jo Michell notes there exist inconsistencies within the populist platform, as it stands. “Reform are bankrolled by affluent backers demanding tax cuts and reduced rules, yet also emphasizing the complaints of working people and the loss of industrial jobs,” he says. “There’s a tension there between rich backers who want radical free-market policies, and this narrative of bringing back British jobs and industrial revival.”
Maintaining Control
Realistically, research indicates neither left nor right populists often perform poorly when confronting real-world challenges (though of course every populist leader claims to offer distinct solutions).
A recent paper from a leading journal examined the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, after 15 years, GDP per capita is often 10% lower in nations run by populist rulers than in comparable countries with more mainstream regimes.
“Financial decline, decreasing macroeconomic stability and the erosion of institutions usually occur together with populist rule,” argue the researchers.
A further interesting result from the study, however, is despite their economic costs, populist figures are often effective at retaining office, lasting on average eight years, versus four for their more moderate equivalents.
Put simply, it remains uncertain that even when their policies fail, such leaders face immediate consequences at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past mundane economics.
Yet back in Buenos Aires, whether the government’s agenda fails or is sustained through foreign assistance, Argentina’s citizens are already bearing significant costs.
