Can Populist-Led Administrations Always Crash the Economic System?

“Dollars, dollars.” Under the scorching heat, dozens of money changers are selling American currency on Florida Street, a bustling pedestrian strip in Buenos Aires. Known as arbolitos (“little trees”), they are thriving ahead of the 26 October congressional elections in a country long used to holding the US dollar.

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

Similar to her, economists from all backgrounds anticipate a depreciation of the national currency after the voting is over. The president has imposed a limit on the currency to control soaring price increases and currently it is artificially high and reserves are depleted, leaving Argentina’s economy stagnant as consumers turn to low-cost foreign goods.

Ideal Conditions

Argentina is a very special case. Argentina has frequently been racked by sovereign defaults and economic crises and the electorate have been susceptible over the years to leftwing populism, such as the influential Peronism, and now the president’s rightwing version.

The president epitomizes populist leadership: charismatic, iconoclastic, promising muscular measures to wrestle back command of economic management from traditional elites for the benefit of the people.

These defining traits are also seen in his ally to the north, and by Nigel Farage, who styles himself as a beer-drinking champion of the common man despite being a public school-educated former stockbroker.

Until recent months, the president’s strategy – including extensive privatisations and severe budget reductions – had earned praise from international lenders for contributing to control price rises under control. This plan has something in common with the policies of his political hero Margaret Thatcher, who similarly viewed rising prices as a monster to be slain, regardless of the consequences.

But investors began losing confidence in the government’s agenda lately following a poor performance in local polls and multiple corruption scandals. Solely large-scale financial intervention from abroad has prevented what seemed destined to be a major currency crisis.

Contradictions

The 2016 referendum in 2016 arguably had similar reasoning, and its figurehead, the former prime minister, swept away concerns regarding fiscal impacts with a bullish determination to enact public demand in the face of elite opposition.

The Reform leader to date outlined limited plans in writing aside from a call for large-scale removals, which he subsequently appeared to revise spontaneously. He wants to rein in the Bank of England, possibly replacing its head, the incumbent, with distrust of a stodgy establishment being a key part of the populist package.

His tax and spending policies seem unsettled: concerned about being accused of planning a Liz Truss-style splurge, he recently abandoned a pledge for significant tax reductions. His Reform party deputy, the party chairman, said they would focus instead on reductions in government expenditure.

Labour aims this stance will enable it to portray the populist as planning to bring back fiscal tightening – a point Rachel Reeves has made repeatedly, contrasting it with her approach of boosting public investment.

Jo Michell notes there exist inconsistencies within the populist platform, such as it is. “Reform are bankrolled by affluent backers calling for lower taxes and reduced rules, but also talking a lot about the complaints of ordinary workers and the loss of industrial jobs,” he explains. “There’s a tension there among rich backers seeking radical free-market policies, and this story of restoring British jobs and industrial revival.”

Holding on to Power

Realistically, the evidence indicates populists of any stripe tend to fare well when confronting real-world challenges (although every populist leader promises something unique).

A recent paper from a leading journal analysed the outcomes of 51 populist presidents and prime ministers, from 1900 to 2020. It found typically, after 15 years, gross domestic product per head is often 10% lower in countries governed by populist leaders compared to similar economies with more mainstream regimes.

“Economic disintegration, weakening economic fundamentals and the erosion of institutions typically go hand in hand under populist governments,” contend the paper’s authors.

A further interesting result of the research, however, is that despite their economic costs, these leaders are often effective at retaining office, remaining in power for a considerable time, compared with shorter tenures for mainstream politicians.

Put simply, it remains uncertain that even when their plans crash, such leaders face immediate consequences in elections. Like the Brexiters’ promise to regain sovereignty, their appeal extends past mundane economics.

Yet returning to Buenos Aires, regardless of if the government’s agenda fails or is kept on life support by external aid, Argentina’s citizens are already bearing a heavy price.