This post appeared in RGE-Monitor (Latin America) on June 25, 2008.
I came across this piece on populism so I decided to share parts of it with you.
“… [E]conomic populism is an approach to economics that emphasizes growth and income redistribution and deemphasizes the risk of inflation and deficit finance, external constraints, and the reaction of economic agents to aggressive non market policies… populist economics ultimately fail; and when they fail it is at a frightening costs to the very groups that were supposed to be favored.
Features:
1. Initial conditions. The populist policymaker—and the population at large—are deeply dissatisfied with the economy’s performance; there is a strong feeling that things can be better. Typically, the country has experienced very moderate growth, stagnation, or outright depression as a result of previous stabilization attempts. This previous stabilization experience often, though not necessarily always, has been implemented under an IMF program and has resulted in reduced growth and lower living standards… The preceding stabilization would generally have improved the budget and external balance (through the accumulation of international reserves) sufficiently to provide the room for, though perhaps not the wisdom of, a highly expansionary program.
2. No constraints. Policy makers explicitly reject the conservative paradigm and ignore the existence of any type of constraints on macroeconomic policy. Idle capacity is seen as providing the leeway for expansion… The risks of deficit finance emphasized in traditional thinking are portrayed as exaggerated or all altogether unfounded. According to populist policymakers, expansion is not inflationary (if there is no devaluation) because spare capacity and decreasing long-run costs contain cost pressures and there is always room to squeeze profit margins by price controls.
3. Policy prescriptions. In light of the initial conditions described above, the populist programs emphasize three elements: reactivation, redistribution of income, and restructuring the economy. The common thread here is “reactivation with redistribution.” The policy recommendation is to actively use macroeconomic policy to redistribute income, typically by large real-wage increases that are not to be passed on into higher prices.
The Phases of Populist Economics
I. The policymakers are fully vindicated in their diagnosis and prescription: growth of output, real wages, and employment are high, and the macroeconomic policies are nothing short of successful.
II. The economy runs into bottlenecks, partly as a result of a strong expansion in demand for domestic goods… Whereas inventory decumulation was an essential feature of the first phase, the low levels of inventories and inventory building are now a source of problems. Price realignments and devaluation, exchange controls, or protection becomes necessary. Inflation increases significantly, but wages keep up. The budget deficit worsens tremendously as a result of pervasive subsidies on wage goods…
III. Pervasive shortages, extreme acceleration of inflation,… lead to capital flight and demonetization of the economy. The budget deteriorates violently because of steep decline in tax collection and increasing subsidy costs. The government attempts to stabilize by cutting subsidies and by a real depreciation. Real wages fall massively, and policies become unstable. It becomes clear that the government is in a desperate situation.
IV. Orthodox stabilization takes over under a new government. More often than not, an IMF program will be enacted; and when everything is said and done, the real wage will have declined massively, to a level significantly lower than when the whole episode began. Moreover, that decline will be very persistent, because the politics and economics of the experience will have depressed investment and capital flight.”
I can personally not agree more with the piece. It is astonishingly actual.[1] If somebody were to write this now, the description of the present situation in
In the current Argentine case it seems that the country is between Phase III and Phase IV, so we should really be worrying. It seems pretty clear that the Kirchners’ administration were able to read the “Features,”… but not the “Phases.”
This has been just a historical piece. But, the question is: Will history repeat itself?
[1] For further details, some of my past posts elaborate on the present policy problems, including the unsustainability of the fiscal balance, the acceleration of the inflation rate, the pervasive income redistribution, among other things.
[2] “The Macroeconomics of Populism in Latin America,” by R. Dornbusch and S. Edwards, NBER, The
