Do Populist Administrations Always Wreck the Economy?
“Dollars, dollars.” Under the blazing sun, dozens of money changers are offering American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), they are thriving before the 26 October congressional elections in a country long used to saving in the greenback.
“The best time to buy is now,” states one arbolito, refusing to provide her identity. “[The dollar] went down slightly but it is a fake-out – it will rebound.”
Similar to her, economic experts from all backgrounds anticipate a devaluation of the Argentine peso once the voting is over. The president has placed a cap on the currency to tame soaring price increases and now it is artificially high and reserves are exhausted, causing the national economy sluggish as consumers turn to low-cost foreign goods.
Fertile Ground
Argentina represents a unique situation. Argentina has been repeatedly hit by debt defaults and economic crises and its voters have been receptive over the years to left-leaning populist movements, in the form of the influential Peronism, and now Milei’s conservative populism.
Milei epitomizes populist leadership: captivating, iconoclastic, promising muscular policies to wrestle back command of economic management from the establishment on behalf of ordinary citizens.
These defining traits are also seen in his political partner to the north, as well as Nigel Farage, who presents himself as a beer-drinking people’s champion despite being a privately educated former stockbroker.
Up until lately, the president’s strategy – involving extensive privatisations and severe budget reductions – had won plaudits from the IMF for contributing to control price rises under control. This plan has something in common with that of his political hero Margaret Thatcher, who also saw rising prices as a monster to be defeated, no matter the cost.
But investors began losing confidence in the government’s agenda lately following a shaky result in provincial elections and a series of graft allegations. Solely massive economic support by the US has prevented what looked set to become a major currency crisis.
Inconsistencies
The 2016 referendum in 2016 arguably had similar reasoning, and its figurehead, the former prime minister, swept away doubts about economic detail with a bullish determination to implement the “will of the people” despite elite opposition.
The Reform leader has so far outlined limited plans to paper except for proposals for large-scale removals, which he subsequently seemed to adjust spontaneously. He wants to curb the central bank, perhaps even ditching its governor, Andrew Bailey, with scepticism toward traditional institutions as a central element of populist rhetoric.
His fiscal plans appear to be in flux: concerned about being accused of planning a Liz Truss-style splurge, he lately abandoned a promise to make large tax reductions. His Reform party deputy, the party chairman, stated they would concentrate instead on reductions in government expenditure.
Labour aims this stance will allow it to portray the populist as intending to reintroduce austerity – an argument the chancellor has emphasized often, contrasting it with her strategy of increasing government spending.
Jo Michell says there exist inconsistencies within the populist platform, as it stands. “The party are bankrolled by affluent backers demanding tax cuts and reduced rules, yet also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he explains. “There is a conflict here among rich backers seeking radical free-market policies, and this story of bringing back UK employment and reindustrialisation.”
Maintaining Control
In truth, research indicates populists of any stripe tend to fare well when confronting practical difficulties (although every populist leader claims to offer something unique).
Recent research from a leading journal analysed the performance of dozens of populist leaders, from 1900 to 2020. It found typically, over the long term, gross domestic product per head is often 10% lower in nations governed by populist rulers compared to comparable countries with more mainstream regimes.
“Financial decline, decreasing macroeconomic stability and the decay of governance usually occur together with populist rule,” contend the paper’s authors.
A further interesting result of the research, though, 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 is not clear that even when their policies fail, populists face immediate consequences in elections. Similar to pledges made to “take back control”, their appeal extends past everyday financial matters.
Yet returning to Buenos Aires, regardless of if the government’s agenda fails or is sustained by external aid, Argentina’s citizens have already paid significant costs.
