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Session 5
Rudiger Dornbusch and Sebastian Edwards, eds., The Macroeconomics of
Populism in Latin America, 1991, pp. 1-35
Introduction
The long history of macroeconomic instability in Latin America is remarkable, especially
compared to SE Asia. Characterized by:
 inflationary outbursts,
 balance of payments crises, and
 painful stabilization attempts.
History: Populist regimes have historically tried to deal with inequality problems through overly
expansive macroeconomic policies relying on debt financing.
Authors’ view: populist experiences failed because of macroeconomic mismanagement.
Main point of papers in this book: The use of macroeconomic policy to achieve distributive goals
has historically led to failure, sorrow and frustration.
Ch.1 – The Macroeconomics of Populism
Summary: Examines characteristics of populism, analyses its economic phases, and looks
history of learning from mistakes.
Self-destructive feature of populism: countries rely on expansive fiscal and credit policies, then
after short period of growth, unsustainable macroeconomic pressures result in plummeting of real
wages and balance of payment difficulties. This induces inflation, crisis, and collapse of the
economic system. Bailout from IMF then produces a drastically restrictive program.
Ch. 1 presents the most salient features populism, and discusses the circumstances that lead
policymakers to repeatedly undertake these policies in spite of historical evidence of the harmful
consequences.
1.1 The Populist Paradigm
Economic populism – approach to economics that emphasizes growth and income redistribution
and deemphasizes the risks of inflation and deficit financing, external constraints, and the
reaction of economic agents to aggressive non-market policies.
Most important features of populist paradigm:
1.
Initial conditions. Preceding stabilization means moderate growth, stagnation, or
depression – dissatisfying economic performance creates appeal for radically
different program.
2.
No constraints. Policy makers ignore existence of restraints on macro policy.
3.
Policy prescriptions. Emphasize 3 elements:
i. Reactivation
ii. Redistribution of income
iii. Restructuring of the economy
1.2 The Phases of Populist economics
Phase 1: Policy makers are vindicated: growth of output, real wages, and employment are high,
inflation not a problem.
Phase 2: Bottlenecks created by strong expansion in demand for local goods and growing lack of
foreign exchange. Price realignments, devaluation, exchange control, or protection become
necessary. Budget deficit worsens, inflation increases.
Phase 3: Pervasive shortages, extreme acceleration of inflation, and foreign exchange gaps lead
to capital flight and demonetization of economy. Decline in tax collection and increasing subsidy
costs. Real wages fall, policies become unstable, government desperate.
Phase 4: Orthodox stabilization under a new government, IMF-implemented program.
1.3 Policy Mistakes, History and Memory
Tendency of populist leaders to argue their situation is unique and immune from historical
lessons. Some evidence from Chile that lessons have been learned.
Ch. 2 – Political Economy of Latin American Populism
By Kaufman and Stallings
Summary: Kaufman and Stallings section: political angles of Latin American populism,
emphasizing the relationship between political and economic goals, as well as the role of unequal
income distribution and class conflict in populism. Argue that in an increasingly global world
economy, experiments in populism will become more rare.
4 questions about populist cycles in Latin America:
1. Why so prevalent in L.A. as opposed to other parts of the world?
2. What accounts for variations in intensity and frequency?
3. What accounts for their persistence – is there a “learning process” that can lead to
positive modifications?
4. What prospects for the future? Have populist cycles ended, and if so, why?
2.1 Definitions: The Economic and Political Context of Populism
Definition of populism as set of economic policies designed to achieve certain political goals.
Political goals are:
1. Organizing support with organized labor and lower-middle-class groups.
2. Obtaining backing from domestic-oriented business.
3. Politically isolating the rural oligarchy, foreign enterprises, and large-scale domestic
industrial elites.
Economic policies to attain these goals are:
1. Budget deficits to stimulate domestic demand.
2. Nominal wage increases plus price controls to effect income redistribution.
3. Exchange-rate control or appreciation to cut inflation and raise wages and profits in
non-traded goods sectors.
Authors rank the various experiences of L.A. populism. Allende (Chile, 1970-73), Peron
(Argentina, 1973-76), and Garcia (Peru, 1985-90) rank high on both political and economic
components of populism. In these periods, labor and other low-income groups constitute primary
support base.
Echeverria (Mexico, 1970-76) and Perez (Venezuela, 1974-78) are less intense. For them,
business groups more dominant and labor weaker.
Sarney (Brazil, 1985-90) is somewhere in between.
Authors conclude that variations in institutional arrangements across countries and time
determine the extent to which distributive struggles are expressed through populist policies.
2.2 Latin American Social Structure: Class and Sectoral Inequalities
2 sets of structural characteristics, both rooted in strong traditional export oligarchies, sets L.A.
apart:
1. High concentration of income and assets
2. Sharp division between people in industry and services vs. primary products export
sector controlled by traditional oligarchies.
While both contributed to populist policies, sectoral divisions seems to account for much of the
differences among populist experiences.
2.3 Party Systems and Cross-national Differences in Populist Policies
Incentives for politicians to form anti-elite coalitions of unions, white-collar employees and importsubstituting industrialists are stronger in societies where popular-sector groups are linked to
parties systematically excluded from electoral competition (ex: Peron and Aprista (Peru)) and/or
in multiparty systems where competing political elites are unable to organize stable electoral
majorities (ex: Chile).
2.4 The Role of Political Regimes and Regime Change
The rules that govern political interaction – such as type of political regime, characteristics of
institutions, and timing of elections – are also important.
Authoritarian regimes – populist policies are unlikely.
Transition democracies – extremely susceptible to populist policies.
Traditional democracies – less likely.
2.5 Repetition of Populist Cycles and Problems of Political Learning.
Populist cycles more recurrent in Argentina, Chile, Brazil, and Peru. Little evidence to suggest
that societies learn from previous populist failures. Factors contributing to maintenance of the
problem:
1. Same factors explaining the intensity of populist policies encourage their recurrence.
2. Social actors have negative perceptions of the alternatives to populist policies.
2.6 Prospects for the Future
Events in last few years suggest changing policy climate.
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Voters have elected leaders running on anti-populist platforms, and populists presidents
have changed their stance once in office.
International system has reduced the viability of populist policies operating within ISI
framework.
U.S. influence on international financial institutions emphasizing fiscal control.
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Demonstrated success of Asia and failures of L.A. and Africa.
Shift in intellectual discourse within L.A. in favor of greater fiscal restraint, trade
liberalization, and privatization.
Changes in access to resources and new divisions cutting across old class and sectoral
lines.
What does this suggest for future outcomes? 4 possible scenarios:
1. Market oriented policies may yield significant improvement in growth, employment,
and price stability.
2. Set of policies maintaining emphasis on balanced accounts and competitiveness but
placing equal weight on equality.
3. If new market policies do not produce results, could see a return to some populist
policies.
4. In a world where international finance is not available, could lead to disintegration of
civil society and deterioration of state capacity to implement policy.