The Macroeconomics of Populism in Latin America

Abstract

The experiences of Chile under Allende and Peru under Garcia illustrate that when populist policies fail they do so at a frightening cost to the very groups they were meant to benefit. The Policy, Planning, and Research Complex distributes PPR Working Papen to dissaninate the findings of work in progress and to encourage the exchange of ideas among Bank staff and all others interested in 'evelopment issues. These papers carry the names of the authors, reflec only their views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own. They should not be attributed to the World Bank, its Board of Directors, its managemrent, or any of its member countries.

The injustice of inequality

“…In other cases, the principal effect has been a change in elites, with continued capture of institutions by those in power. Dornbusch and Edwards (1991) present a depressing account of macroeconomic populism in Latin America, motivated largely by redistribution, and setting back the development of the region by decades.…”

Populism and Institutional Capture

“…The long-term economic effects of populist policies analyzed by Dornbusch and Edwards (1991) is at odds with the persistence in office that populist leaders seem to have enjoyed in recent years, and suggests the use of some kind of incumbent advantage to preserve their power. The key aim of this paper is to understand if populist politicians have a larger incentive to take actions aimed at remaining in office despite the will of voters, and to study the incentives for voters to elect politicians who may then attempt such a capture.…”

“…Our work can be compared to the analysis on populism performed by Acemoglu et al (2013a), which is also inspired by the definition of macroeconomic populism of Dornbusch and Edwards (1991). Acemoglu et al (2013a) denote populism "as the implementation of policies receiving support from a significant fraction of the population, but ultimately hurting the economic interests of this majority", and operationalize this definition as a policy left of the median voter, studying the incentives for the implementation of populist policies on a ideological line.…”

“…While Marxist rhetoric refers to a struggle between classes, populist rhetoric underlines the contrast between the people as a whole and a corrupt elite. Dornbusch and Edwards (1991) look at the economic content of populist proposals, and conclude that populism presents easy solutions to complex problems, which can be welfare enhancing in the short term but costly in the long run. This view is shared by Sachs (1989), who calls this type of dynamics "the populist policy cycle".…”

“…We adopt one stylized fact about populism: that as in Dornbusch and Edwards (1991), the effect of populism on welfare is positive in the short term, but negative in the long-run. We find that populist politicians are particularly likely to seize control of institutions because voters would like to replace them when the costs of their policies take effect.…”