On Populism in Argentina (and other Latin American Countries)

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 Argentina (and some other Latin American countries) can hardly be more accurate. The sad part of it is that this has been taken from a book printed in 1991[2] and based on the Latin American experiences of the 1950s-1980s! So we should have learned from our past mistakes instead of falling once and again on the same errors.

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 University of Chicago Press, 1991.

3 Responses to "On Populism in Argentina (and other Latin American Countries)"

  1. ewulf   June 25, 2008 at 4:56 pm

    This topic it is interesting because it deal with the connection between economics and politics.I would add that economics populism,is precisely the wrong mix between both.It has also been stated as the Hirschmann Hypothesis,which says that there is relationship between the economic cycles and the political cycle.Populism become the bottom line of such a cycle. On the other side,Hirschmann argues that such a situation arises, when there is not match between economy and politics.Thus, when politics get mature enough ,and match the economy requirements, the economy goes on its own to get economic growth.Thus Politicians with their mind fixed in the past, will lead the economy to the past.It follows that politicians with mind fixed in the future,will lead the economy into the future.Some examples in Latin America?. Brazil, Perú,Uruguay,Chile.Do politicians have learnt from the past ,or do politicians have not modernize their approach yet?.It seems more relevant the later than the former,because politics has its own timing.

  2. Anonymous   June 25, 2008 at 6:07 pm

    Nicolas: I personally feel that this is such a relevant topic in current Latin American; thank you very much for placing this issue on the LatAm RGE site. I agree that there are so many parallels between the economic (and political) behavior of many current LA governments today to the economic populist framework laid out by Rudiger and Dornbusch as well as the various governments discussed in their book by other authors. Mostly, I am amazed at how current LA governments have seemed to forget about the dangerous consequences of economic populism. However, I’m trying to understand how these current governments (as well as the public) could repeat these policies and thus be willing to accept the high likelihood of the devastating consequences that come with them. I have to assume that many elites and a significant chunk of the public are aware of the dangers of economic populism. Given this, two things come to mind, at least in the Argentina case, in trying to explain today’s seemingly risky economic policies: 1.) drawing on prospect theory, its possible that the public and leaders have been in the domain of losses since the major economic crisis in 2002 which means they are willing to take major economic risks in hopes of reaching as quickly as possible similar economic levels seen prior to the crisis; and 2.) maybe the external environment today is different enough for Argentina (and possibly other countries) compared to the external environment under previous LA economic populist episodes. If so, this might allow it to pursue populist economic policies for a longer time and with more success. Maybe when the external environment deteriorates (more slowly and in the more distant future compared to the deteriorations affecting LA in the past), there will be more of a political will and consensus – domestically – to move back towards the neoliberal model and to an economic development paradigm that resembles more of what is seen today in Chile, Brazil, and Uruguay. I hope that these three latter and more moderate countries do not experience a major economic crisis while the populist ones stay free and clear. If this happens, then I’m afraid that the moderate economic development approach that has been pursued by Chile, Brazil, and Uruguay in recent years will be discredited. If they can succeed more than those economic populists – Argentina, Bolivia, Ecuador, Nicaragua, and Venezuela – then maybe they will be the saviors of the general/broad free market model of economic development.

  3. Alan   June 26, 2008 at 10:31 am

    It is inconceivable to me how politicians and economists (so called), do not learn from the experience of previous populist presidential periods. Argentina, with what is probably the most highly educated population in the region, is the classic example – where regardless of former experience – populist governments are regularly voted back in to power. Conversely, see the the results of other left of centre Latin American governments (Chile, Brazil, Peru)that have instituted conservative economic policies and show gains over the years that have resulted in marked reductions in poverty and solid macroeconomic figures year after year.