Do Populist Administrations Inevitably Wreck the Economy?
“Exchange, exchange.” Under the scorching heat, scores of money changers are selling American currency on Florida Street, a lively shopping street in Buenos Aires. Referred to as arbolitos (“little trees”), their business is booming ahead of the October 26 midterm elections in a country long used to holding the greenback.
“The optimal moment for purchasing is currently,” states a arbolito, declining to give her identity. “[The dollar] dropped slightly but it’s deceptive – it will rebound.”
Similar to her, economists from all backgrounds expect a devaluation of the national currency after the election concludes. President Javier Milei has imposed a limit on the currency to tame soaring inflation and currently it is overvalued and foreign reserves are depleted, leaving the national economy sluggish as consumers turn to cheap imports.
Ideal Conditions
The nation represents a unique situation. The country has been repeatedly racked by sovereign defaults and financial turmoil and the electorate have been receptive over the years to leftwing populism, in the form of the powerful Peronism, and currently Milei’s rightwing version.
Milei is a textbook populist: charismatic, unconventional, vowing muscular policies to reclaim command of economic management from traditional elites on behalf of ordinary citizens.
These defining traits are also seen in his ally in the United States, as well as the UK politician, who styles himself as a pint-swilling people’s champion even though he is a privately educated former stockbroker.
Until recent months, the president’s strategy – including extensive privatisations and severe public spending cuts – had earned praise from international lenders for contributing to bring inflation in check. The programme shares similarities with that of Milei’s idol Margaret Thatcher, who also saw inflation as a dragon to be slain, no matter the cost.
However financial markets started to doubt in Milei’s radical project in recent months following a shaky result in provincial elections and multiple corruption scandals. Only large-scale financial intervention by the US has prevented what seemed destined to be a full-blown currency crisis.
Inconsistencies
The 2016 referendum several years ago arguably had some of the same logic, and its figurehead, Boris Johnson, dismissed doubts regarding fiscal impacts with confident resolve to enact the “will of the people” despite elite opposition.
Farage to date outlined limited plans in writing aside from proposals for mass deportations, that he later seemed to adjust on the hoof. He wants to curb the central bank, perhaps even replacing its head, Andrew Bailey, with distrust toward traditional institutions being a key part of the populist package.
His tax and spending policies seem unsettled: concerned about being accused of proposing reckless spending, he lately abandoned a promise for large tax reductions. His second-in-command, the party chairman, stated they would concentrate instead on public spending cuts.
The opposition aims this position will enable it to portray the populist as planning to bring back austerity – a point the chancellor has emphasized often, contrasting it with her strategy of increasing government spending.
An economics professor notes there exist inconsistencies in Farage’s economic programme, such as it is. “Reform are bankrolled by very wealthy people demanding lower taxes and reduced rules, yet also talking a lot about the grievances of working people and the loss of industrial jobs,” he explains. “There’s a tension there among wealthy supporters who want Thatcherism on steroids, and this story of restoring British jobs and reindustrialisation.”
Maintaining Control
In truth, research suggests populists of any stripe tend to fare well when confronting practical difficulties (though of course every populist leader claims to offer distinct solutions).
Recent research in the American Economic Review examined the outcomes of 51 populist presidents and prime ministers, over more than a century. It found typically, after 15 years, gross domestic product per head tends to be a tenth less in countries governed by populist rulers than in comparable countries under conventional leadership.
“Financial decline, weakening economic fundamentals and the erosion of institutions usually go hand in hand with populist rule,” contend the researchers.
A further interesting result of the research, however, is that despite their economic costs, these leaders are often effective at holding on to power, remaining in power for eight years, versus shorter tenures for their more moderate equivalents.
Put simply, it is not clear that even when their policies fail, populists immediately pay the price at the ballot box. Similar to pledges made to regain sovereignty, their appeal extends past everyday financial matters.
Yet back in Buenos Aires, regardless of if Milei’s populist project collapses or is kept on life support through foreign assistance, Argentina’s citizens are already bearing significant costs.