🔗 Share this article

“Cambio, cambio.” Under the scorching heat, scores of currency traders are offering American currency along Florida Street, a lively pedestrian strip in Buenos Aires. Referred to as arbolitos (“little trees”), they are thriving ahead of the October 26 midterm elections in a nation long used to holding the greenback.

“The optimal moment to buy is currently,” says a arbolito, declining to give her name. “[The dollar] dropped a little but it’s deceptive – it will rebound.”

Similar to her, economists from all backgrounds anticipate a depreciation of the Argentine peso once the voting concludes. President Javier Milei has placed a cap on the peso to tame soaring price increases and currently it is artificially high and foreign reserves are depleted, leaving Argentina’s economy stagnant as consumers opt for low-cost foreign goods.

Ideal Conditions

The nation is a very special case. The country has frequently been racked by sovereign defaults and financial turmoil and its voters have been susceptible for decades to left-leaning populist movements, in the form of the influential Peronist movement, and now the president’s conservative populism.

Milei is a textbook populist: captivating, unconventional, promising muscular measures 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 in the United States, as well as the UK politician, who presents himself as a pint-swilling people’s champion even though he is a public school-educated ex-finance professional.

Up until lately, Milei’s approach – involving extensive privatisations and severe budget reductions – had earned praise from the IMF for helping to bring inflation in check. The programme shares similarities with the policies of his political hero Margaret Thatcher, who similarly viewed inflation as a dragon to be defeated, no matter the cost.

However financial markets started to doubt in Milei’s radical project in recent months after a shaky result in provincial elections and multiple corruption scandals. Only massive economic support by the US has averted what seemed destined to be a major monetary collapse.

Contradictions

The 2016 referendum several years ago likely contained some of the same logic, and its leader, Boris Johnson, swept away doubts about economic detail with confident resolve to implement the “will of the people” in the face of elite opposition.

The Reform leader has so far committed few policies in writing aside from a call for large-scale removals, that he later seemed to adjust spontaneously. He wants to rein in the Bank of England, perhaps even ditching its governor, the incumbent, with distrust toward traditional institutions as a central element of populist rhetoric.

His fiscal plans appear to be in flux: concerned about being accused of planning reckless spending, he recently abandoned a pledge for large tax reductions. His Reform party deputy, Richard Tice, said they would focus instead on reductions in government expenditure.

The opposition hopes this position will allow it to portray the populist as planning to bring back fiscal tightening – a point the chancellor has emphasized often, contrasting it with her approach of boosting public investment.

An economics professor notes there are contradictions within the populist platform, as it stands. “Reform is funded by very wealthy people calling for lower taxes and deregulation, yet also talking a lot about the grievances of ordinary workers and the decline of industrial jobs,” he says. “There is a conflict here among rich backers who want Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

In truth, the evidence indicates populists of any stripe tend to fare well when faced with real-world challenges (though of course every populist leader promises something unique).

A recent paper from a leading journal analysed the outcomes of dozens of populist leaders, over more than a century. It found typically, after 15 years, gross domestic product per head is often 10% lower in countries run by populist leaders than in similar economies with more mainstream regimes.

“Financial decline, 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 even with their negative impacts, these leaders are often effective at retaining office, remaining in power for eight years, compared with shorter tenures for mainstream politicians.

In other words, it is not clear that even when their policies fail, such leaders face immediate consequences at the ballot box. Similar to pledges made to “take back control”, their attraction reaches beyond everyday financial matters.

Yet back in Buenos Aires, whether Milei’s populist project collapses or is kept on life support through foreign assistance, Argentina’s citizens have already paid significant costs.