Can Populist Administrations Always Wreck the Economy?

“Exchange, exchange.” Under the blazing sun, dozens of currency traders are selling American currency along Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 congressional elections in a country accustomed to saving in the US dollar.

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

Like her, economic experts from all backgrounds anticipate a devaluation of the Argentine peso after the voting concludes. The president has imposed a limit on the currency to tame soaring price increases and now it is overvalued and foreign reserves are exhausted, causing the national economy stagnant as buyers opt for low-cost foreign goods.

Ideal Conditions

Argentina represents a unique situation. Argentina has frequently been racked by debt defaults and financial turmoil and the electorate have been susceptible for decades to leftwing populism, in the form of the powerful Peronism, and currently Milei’s rightwing version.

The president is a textbook populist: charismatic, unconventional, vowing forceful policies to wrestle back control of the economy from the establishment for the benefit of the people.

These defining traits are shared by his political partner in the United States, as well as Nigel Farage, who styles himself as a pint-swilling champion of the common man even though he is a public school-educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and deep public spending cuts – had earned praise from the IMF for contributing to bring inflation under control. The programme shares similarities with that of Milei’s idol the former UK prime minister, who similarly viewed inflation as a monster to be defeated, regardless of the consequences.

But financial markets began losing confidence in the government’s agenda in recent months after a shaky result in provincial elections and a series of corruption scandals. Only large-scale financial intervention from abroad has averted what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum several years ago likely contained similar reasoning, and its leader, the former prime minister, swept away doubts about economic detail with confident resolve to enact the “will of the people” despite elite opposition.

Farage has so far committed few policies to paper aside from a call for mass deportations, that he later appeared to revise on the hoof. He aims to rein in the central bank, possibly replacing its head, the incumbent, with distrust of a stodgy establishment as a central element of populist rhetoric.

His tax and spending policies appear to be unsettled: concerned about facing criticism for planning a Liz Truss-style splurge, he recently dropped a pledge to make large tax reductions. His second-in-command, the party chairman, stated they would focus instead on public spending cuts.

The opposition hopes this position will enable it to portray the populist as intending to reintroduce fiscal tightening – a point Rachel Reeves has emphasized often, comparing it unfavorably to her approach of increasing public investment.

Jo Michell notes there exist inconsistencies in Farage’s economic programme, as it stands. “The party are bankrolled by very wealthy people calling for lower taxes and reduced rules, but also talking a lot about the complaints of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict here among wealthy supporters who want radical free-market policies, and this story of restoring British jobs and industrial revival.”

Maintaining Control

In truth, the evidence suggests populists of any stripe tend to fare well when faced with practical difficulties (although every populist leader promises distinct solutions).

A recent paper from a leading journal analysed the performance of 51 populist presidents and prime ministers, over more than a century. It found typically, after 15 years, GDP per capita tends to be a tenth less in nations run by populist rulers compared to similar economies under conventional leadership.

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

A further interesting result from the study, however, is that even with their negative impacts, populist figures tend to be good at retaining office, lasting on average eight years, compared with shorter tenures for mainstream politicians.

In other words, it is not clear whether even if their plans crash, populists immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their appeal reaches beyond everyday financial matters.

Yet back in Buenos Aires, whether the government’s agenda fails or is sustained by external aid, the Argentine people have already paid significant costs.