Economics 464: Populism And Economic Populism Background

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Populism has a long tradition in the United States and in Latin America. In the US, both the Occupy Movement and the Tea Party can be considered populist, one on the left of the political spectrum and the other on the right. Populists tend to shun traditional political parties, often argue that the system is broken and corrupt, and try to go directly to the people in their appeals. They are often led by a charismatic individual. In Latin America, Juan Peron of Argentina is probably the most well-known populist leader. Others included Lopez Portillo in Mexico, Goulart in Brazil, and Garcia in Peru. The debate exists among historians and political scientists regarding whether socialists like Castro or Salvador Allende can be considered populists.

Traditionally, populist movements in Latin America focus on three main goals: democratic inclusion, economic nationalism, and social justice. A new type of populism, termed 'economic populism,' emerged post-World War II, characterized by a disregard for economic constraints such as budgets, exchange rates, and external trade limitations. Dornbusch and Edwards define economic populism as policies emphasizing growth and redistribution that minimize or deny concerns over inflation risks, deficit financing, and external constraints. It tends to thrive in environments lacking stable majorities, where excluded groups support populist leaders, especially during political transitions to democracy.

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Populism is a political approach that often features opposition to the established political elite, emphasizing direct appeals to the general populace. It is rooted in promoting the interests and opinions of ordinary people, frequently led by charismatic leaders. In contrast, 'economic populism' is a specific form of populism that emerged prominently in Latin America after World War II. Its defining features are the aggressive pursuit of growth and redistribution policies that largely ignore the traditional economic constraints such as inflation control, fiscal discipline, and external balance considerations.

The classical populist movements in Latin America typically promoted democratic inclusion, economic nationalism, and social justice, largely emphasizing the redistribution of wealth, political participation, and self-sufficiency. These movements often occurred in countries where traditional elite dominance was challenged, and excluded social groups gained political support for populist leaders. Examples include Juan Peron in Argentina, Luis Goulart in Brazil, and Alan García in Peru. However, the emergence of 'economic populism' represented a shift where leaders adopted ultra-expansionist policies that prioritized short-term growth or redistribution at the expense of economic stability.

Phases of the Economic Populist Cycle

The cycle of economic populism can be characterized by four distinct phases, as formulated by Dornbusch and Edwards. Initially, the cycle starts with a period of dissatisfaction with the status quo—often following recession or economic stagnation—and a rejection of constraining macroeconomic policies. This leads to a policy approach focused on reactivating the economy, redistributing income, and restructuring economic sectors to stimulate demand and growth.

The first phase, termed 'vindication,' sees growth, increasing real wages, and rising employment, convincing both the populace and policymakers of the success of expansionist policies. Next, in the 'bottlenecks' phase, demand outpaces supply, foreign exchange shortages emerge, and inflation begins to rise, causing the deficits to deteriorate. The third phase, marked by 'pervasive shortages,' involves rapid inflation acceleration, exhausted foreign exchange reserves, and unsustainable subsidies, which require austerity measures that are politically and socially painful.

Finally, the 'orthodox stabilization' phase involves implementing austerity policies—cutting budgets, raising interest rates, and liberalizing trade—to restore economic stability, often at the cost of significant recession, increased unemployment, and lower real wages. These cycles often leave countries worse off in terms of income distribution and economic stability, reflecting the destructive potential of populist policies when mismanaged.

Peru’s Experience Under Alan García (1985–1990): Reflection of Economic Populism

The case of Peru under President Alan García’s first term provides a textbook example of economic populism. García’s initial policies aimed at raising real wages and stimulating demand, based on the populist principle of reactivation, redistribution, and restructuring. During 1986 and 1987, the economy responded with robust growth, low inflation, and increased employment, largely due to idle capacity and unemployed workers, aligning with the populist cycle's initial phase.

However, this policy approach soon led to economic bottlenecks. Essential imports became scarce, inflation re-emerged, and the current account deficits increased, reflecting the second and third phases of the cycle. The government’s response—nationalizing sectors and expanding credit subsidies—further destabilized the economy, leading to hyperinflation and deep recession by 1990. Despite efforts to implement orthodox stabilization policies, the accumulated distortions and social costs reflected the destructive nature of economic populism.

García’s initial attempt to boost demand through expansionary policies fits within the 'reactivate, redistribute, restructure' framework of economic populism. Nonetheless, the ensuing economic crisis, characterized by hyperinflation, capital flight, and falling real wages, demonstrated the unsustainability of populist policies that disregard macroeconomic constraints. His later revival of more orthodox policies in his second term indicates a recognition of the necessity of fiscal discipline to restore stability.

Therefore, Peru’s experience under García’s first presidency exemplifies critical features of economic populism, including expansionist policies driven by popular support, disregard for economic constraints, and eventual economic collapse, consistent with the theoretical model of Dornbusch and Edwards. This case underscores the importance of balancing growth policies with sound economic management to achieve sustainable development.

References

• Dornbusch, R., & Edwards, S. (1991). The Macroeconomics of Populism in Latin America. Journal of Development Economics, 33(2), 229-243.
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