How Populism Harms Prosperity: Unified Populist Rule Reduces Investment, Innovation, and Productivity

Abstract

The economic cost of populism is high. This paper finds that when a populist executive rules alongside a populist majority in the legislature, this reduces a country’s growth rate of real per capita income considerably for over a decade, before returning to the pre-populist equilibrium. We also outline the mechanics behind these numbers and provide systematic evidence for our argument. Unified populist governments engage in protectionism, inefficient redistribution and financial repression that undermines productivity by increasing the size of government without parallel investments in infrastructure, basic science, and education. Their policies also reduce private investment, R&D spending, researchers per capita, and patents per capita. This is true for populists from either the left or right, in rich or poor countries, in nations open to trade or less open, and across both liberal democracies and authoritarian regimes. We arrive at these findings by estimating ARDL dynamic panel models via System GMM, which increases our confidence that these long run effects run from populism to economic underdevelopment. This paper also introduces a new conceptualization of populism that identifies if populists are in control of both the executive and legislative branches.