Do Populist-Led Administrations Inevitably Crash the Economy?

“Cambio, cambio.” Under the blazing sun, dozens of money changers are selling American currency along Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“little trees”), they are thriving before the October 26 midterm elections in a country accustomed to holding the greenback.

“The best time to buy is currently,” 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 across the spectrum expect a devaluation of the Argentine peso after the election concludes. The president has placed a limit on the currency to tame triple-digit price increases and now it is artificially high and reserves are exhausted, causing the national economy stagnant as consumers opt for low-cost foreign goods.

Ideal Conditions

The nation is a very special case. Argentina has frequently been hit by sovereign defaults and economic crises and its voters have been receptive over the years to leftwing populism, in the form of the powerful Peronism, and currently the president’s rightwing version.

The president epitomizes populist leadership: captivating, iconoclastic, promising forceful policies to wrestle back command of the economy from traditional elites for the benefit of the people.

These key characteristics are also seen in his political partner to the north, and by the UK politician, who styles himself as a pint-swilling people’s champion despite being a public school-educated ex-finance professional.

Up until lately, the president’s strategy – including extensive privatisations and severe budget reductions – had won plaudits from the IMF for helping to bring inflation under control. This plan shares similarities with that of his political hero the former UK prime minister, who also saw inflation as a dragon to be slain, regardless of the consequences.

However investors started to doubt in the government’s agenda in recent months after a poor performance in provincial elections and multiple corruption scandals. Only large-scale financial intervention from abroad has prevented what seemed destined to be a full-blown currency crisis.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its leader, the former prime minister, dismissed doubts regarding fiscal impacts with a bullish determination to implement public demand despite elite opposition.

Farage to date committed few policies in writing aside from a call for mass deportations, which he subsequently appeared to revise spontaneously. He wants to rein in the central bank, possibly replacing its head, the incumbent, with scepticism toward traditional institutions being a key part of populist rhetoric.

His fiscal plans appear to be unsettled: wary of being accused of planning reckless spending, he lately abandoned a pledge for large tax cuts. His Reform party deputy, the party chairman, stated they would focus instead on public spending cuts.

The opposition hopes this stance will enable it to portray the populist as planning to bring back austerity – an argument the chancellor has made repeatedly, contrasting it with her approach of boosting public investment.

An economics professor says there are contradictions in Farage’s economic programme, such as it is. “Reform is funded by affluent backers calling for tax cuts and reduced rules, yet also emphasizing the complaints of ordinary workers and the loss in manufacturing employment,” he explains. “There’s a tension there among rich backers seeking Thatcherism on steroids, and this narrative of restoring British jobs and reindustrialisation.”

Maintaining Control

Realistically, research indicates neither left nor right populists tend to fare well when faced with practical difficulties (though of course each charismatic individual claims to offer distinct solutions).

Recent research from a leading journal analysed the performance of 51 populist presidents and prime ministers, from 1900 to 2020. The study revealed typically, after 15 years, gross domestic product per head is often a tenth less in countries governed by populist leaders than in similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the decay of governance usually occur together with populist rule,” argue the researchers.

A further interesting result of the research, though, is despite their economic costs, these leaders are often effective at holding on to power, remaining in power for a considerable time, compared with four for their more moderate equivalents.

In other words, it remains uncertain that even when their policies fail, such leaders face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their attraction reaches beyond mundane economics.

But back in Buenos Aires, whether the government’s agenda fails or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.