The Macroeconomics of Populism in Latin America.

Li, Jane-Yu Ho

The papers collected in this volume are research products from a project organized by the National Bureau of Economic Research. The papers note that macroeconomic instability has dominated the economic history of Latin America in the past century. Some of this instability has been exacerbated by the repeated adoption of the populist policies defined in this volume. The project attempts to answer the question of whether the repetition of these policies is due to ignorance about the mechanics (and hence the consequences) of deficit financing or to a deliberate policy choice pressured by the general prevalence of a highly skewed income distribution in this region.

The first part of the book contains three chapters that deal with the central themes. In chapter 1 the editors describe the economic populist paradigm in four phases of economic conditions characterized by strategies emphasizing demand expansion, wage increase, price control, and import substitution. Various populist policies aimed at income redistribution all ended with similar results: domestic shortages, hyperinflation, budget and balance-of-payment deficits, currency overvaluation, and capital flight. These problems made the economy unsustainable and eventually hurt the poor more.

It is particularly useful for the editors to point out some of the overly optimistic (and sometimes erroneous) economic beliefs behind these policies. The beliefs are that (1) inflation can be halted by price control and overvaluation of the currency, counting on the utilization of the existing idle capacity and benefits from the economies of scale; (2) deficit financing of government is useful to boost the general demand level while disregarding the associated problems; and (3) foreign exchange constraint and capital flight do not matter.

In chapter two, Robert R. Kaufman and Barbara Stallings addressed the political aspect of Latin America populism. They note that the historical existence of commodity export oligarchies and related income inequality help to explain part of the pressure for implementing populist policies. (According to one measurement, this region's income inequality is 1.5 times greater than that in some Asian countries.) Kaufman and Stallings define populism with a set of economic policies designed to achieve some political goals. Their definition emphasizes the building of a coalition of labor and lower middle class business sectors having a domestic orientation, while excluding the rural oligarchy and multinational enterprises. This definition therefore excludes "right-wing" populism and populism with a rural focus. The authors also examine various regimes in the region and find some correlation between the type of regime and the choice of economic policies. Further, they note that there is a relationship between the repetition of populist cycles and the insecurity of the political regime.

Chapter 3, by Eliana Cardoso and Ann Helwege, addresses the heterogeneity of various populist regimes in economic strategy and motivation. They distinguish economic populism, which stresses the repeated willingness to push demand beyond economic bonds, from the classical definition of "populist regime" used by political scientists. They also defend the usefulness of some populist policies (such as import substitution) in earlier decades and point out that some of these poor economic policies were not necessarily the result of a populist regime. Some conservative regimes also encountered similar problems. And, policies other than populist ones (i.e., left-wing policies regarding private property rights) also exacerbated the problems. These discussions serve as important qualifiers for the general conclusions made in chapter 1. In his commentator's remarks, William Cline reminds readers that there is extensive literature on income distribution and economic growth. He notes that a list of successful strategies for growth with equity would include restraints on budget and wage, more targeted antipoverty programs, and outward economic orientation.

The second part of the book deals with populist experiences in six countries--Argentina, Chile, Brazil, Mexico, Peru, and Nicaragua--and the exceptional case of Colombia, which did not adopt populist policies. These chapters were mostly written by economists and supplemented with commentator's remarks. Each chapter examines the details of a country's experiences on economic and political conditions as well as the policies themselves and the consequences of those policies. The authors also review various circumstances that might explain the policy choices. Some authors or commentators mention reasons other than income inequality that also help to explain these mistaken policy choices. These reasons include inadequate understanding of economic mechanisms. Lack of credibility--i.e., general doubts regarding the government's capability to continuously provide stable economic environment--also made economic collapse almost inevitable. It led to behaviors such as hoarding that fueled inflation. In the case of Colombia, the chapter's authors stress the contribution of technocrats in setting economic policies that avoided the populists' mistakes. A more stable two-party democracy and a free press are also cited as reasons why Colombia rejected populist policies.

The editors urge further research on how to better tackle the problems of redistributing income while avoiding macroeconomic mismanagement. This book would be useful reading for policy analysts who monitor the development of Latin American economies, and for those economists who are interested in helping the newly independent Eastern European economies to avoid some unnecessary economic pain. However, the book lacks comparisons with Asian countries detailing why they managed to resist the pressure to adopt populist policies. Was it due to better initial income distribution or a slower development of political democracy? How did Asian countries improve their income distribution over time? Were these policies similar to those adopted in Colombia? Perhaps these questions deserve another NBER project funding.

Jane-yu Ho Li U.S. General Accounting Office