Can Populist Administrations Inevitably Crash the Economy?
“Cambio, cambio.” Under the blazing sun, dozens of currency traders are offering American currency along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a nation long used to holding the US dollar.
“The optimal moment to buy is now,” states one arbolito, refusing to provide her identity. “[The dollar] went down a little but it is a fake-out – it will rebound.”
Similar to her, economic experts from all backgrounds expect a depreciation of the national currency once the voting is over. President Javier Milei has placed a limit on the peso to tame soaring price increases and now it remains overvalued and foreign reserves are depleted, causing the national economy sluggish as buyers turn to low-cost foreign goods.
Ideal Conditions
The nation is a very special case. Argentina has frequently been racked by debt defaults and economic crises and its voters have been susceptible over the years to left-leaning populist movements, such as the influential Peronist movement, and now Milei’s rightwing version.
Milei epitomizes populist leadership: captivating, unconventional, promising muscular measures to reclaim command of economic management from the establishment on behalf of ordinary citizens.
These defining traits are also seen in his ally in the United States, and by the UK politician, who styles himself as a beer-drinking people’s champion even though he is a privately educated ex-finance professional.
Until recent months, the president’s strategy – involving 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 his political hero the former UK prime minister, who also saw rising prices as a dragon to be slain, no matter the cost.
However investors started to doubt in Milei’s radical project lately after a shaky result in provincial elections and a series of graft allegations. Only massive financial intervention by the US has prevented what seemed destined to be a full-blown monetary collapse.
Contradictions
The vote for Brexit in 2016 arguably had some of the same logic, and its figurehead, the former prime minister, swept away concerns about economic detail with confident resolve to enact public demand in the face of the establishment’s horror.
Farage has so far committed few policies in writing except for a call for mass deportations, which he subsequently seemed to adjust spontaneously. He wants to rein in the central bank, perhaps even replacing its head, Andrew Bailey, with distrust of a stodgy establishment being a key part of populist rhetoric.
His tax and spending policies appear to be in flux: concerned about being accused of proposing a Liz Truss-style splurge, he lately dropped a pledge for large tax cuts. His Reform party deputy, the party chairman, said they would focus instead on public spending cuts.
The opposition aims this stance will enable it to depict the populist as planning to bring back austerity – an argument Rachel Reeves has made repeatedly, contrasting it with her approach of increasing public investment.
Jo Michell says there exist inconsistencies within the populist platform, such as it is. “The party are bankrolled by very wealthy people demanding tax cuts and deregulation, yet also emphasizing the complaints of working people and the decline of industrial jobs,” he explains. “There’s a tension there between rich backers seeking radical free-market policies, and this story of bringing back UK employment and industrial revival.”
Maintaining Control
In truth, research indicates populists of any stripe tend to fare well when faced with practical difficulties (although every populist leader promises something unique).
Recent research from a leading journal analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, over the long term, GDP per capita is often 10% lower in countries run by populist leaders than in similar economies under conventional leadership.
“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically go hand in hand with populist rule,” contend the researchers.
A further interesting result of the research, though, is even with their negative impacts, populist figures tend to be good at retaining office, lasting on average a considerable time, compared with shorter tenures for their more moderate equivalents.
Put simply, it remains uncertain that even when their plans crash, such leaders face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their attraction reaches beyond mundane economics.
But returning to Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support through foreign assistance, Argentina’s citizens have already paid a heavy price.
