Do Populist-Led Administrations Inevitably Crash the Economy?

“Dollars, dollars.” Beneath the blazing sun, scores of currency traders are selling American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the October 26 midterm elections in a country accustomed to holding the greenback.

“The best time for purchasing is now,” says a arbolito, refusing to provide her identity. “[The dollar] dropped a little but it is a fake-out – it’ll rise again.”

Like her, economic experts from all backgrounds expect a devaluation of the national currency after the voting concludes. The president has placed a cap on the peso to control soaring inflation and currently it is overvalued and reserves are exhausted, leaving Argentina’s economy stagnant as consumers turn to cheap imports.

Ideal Conditions

Argentina is a very special case. The country has been repeatedly hit by sovereign defaults and financial turmoil and the electorate have been receptive for decades to left-leaning populist movements, such as the influential Peronism, and now the president’s conservative populism.

The president epitomizes populist leadership: captivating, unconventional, vowing forceful policies to wrestle back control of the economy from the establishment on behalf of the people.

These key characteristics are also seen in his ally in the United States, and by the UK politician, who presents himself as a beer-drinking champion of the common man even though he is a privately educated ex-finance professional.

Until recent months, the president’s strategy – including widespread sell-offs and deep budget reductions – had won plaudits from international lenders for contributing to bring inflation in check. The programme shares similarities with that of his political hero the former UK prime minister, who similarly viewed inflation as a dragon to be defeated, no matter the cost.

However financial markets started to doubt in the government’s agenda lately following a poor performance in provincial elections and multiple corruption scandals. Only massive economic support from abroad has prevented what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The 2016 referendum in 2016 likely contained similar reasoning, and its leader, Boris Johnson, swept away concerns regarding fiscal impacts with confident resolve to implement the “will of the people” despite elite opposition.

The Reform leader has so far outlined limited plans in writing aside from proposals for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to rein in the Bank of England, perhaps even ditching its governor, Andrew Bailey, with scepticism of a stodgy establishment being a key part of populist rhetoric.

His tax and spending policies appear to be in flux: wary of facing criticism for planning a Liz Truss-style splurge, he recently abandoned a pledge to make significant tax reductions. His Reform party deputy, Richard Tice, said they would concentrate instead on reductions in government expenditure.

Labour hopes this stance will enable it to depict Farage as planning to bring back austerity – an argument Rachel Reeves has emphasized often, comparing it unfavorably to her approach of boosting public investment.

An economics professor says there exist inconsistencies within the populist platform, as it stands. “Reform is funded by affluent backers demanding tax cuts and reduced rules, yet also emphasizing the complaints of working people and the loss in manufacturing employment,” he explains. “There’s a tension here among rich backers who want Thatcherism on steroids, and this narrative of restoring British jobs and reindustrialisation.”

Holding on to Power

Realistically, the evidence indicates populists of any stripe tend to fare well when confronting real-world challenges (although each charismatic individual claims to offer something unique).

Recent research in the American Economic Review analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. It found that on average, over the long term, gross domestic product per head tends to be a tenth less in countries governed by populist rulers compared to comparable countries under conventional leadership.

“Financial decline, weakening economic fundamentals and the erosion of institutions typically go hand in hand with populist rule,” argue the researchers.

A further interesting result from the study, though, is even with their negative impacts, these leaders tend to be good at holding on to power, lasting on average a considerable time, versus four for their more moderate equivalents.

Put simply, it is not clear that even when their plans crash, such leaders face immediate consequences in elections. Like the Brexiters’ promise to “take back control”, their appeal extends past mundane economics.

But back in Buenos Aires, whether the government’s agenda fails or is sustained by external aid, the Argentine people are already bearing a heavy price.