NS4540 Winter Term 2018 Populist Policies Europa brazil economy

Overview I Rabobank, “Latin America: Progress through Populist policies? A Mixed Picture, September 28, 2015 Main Points Latin American countries have managed to reduce poverty and income inequality over the last 15 years Likely to have contributed to political stability However a number of countries during the commodity super-cycle (2003-11) pursued populist policies in the form of unsustainable macro-economic and aggressive non-market policies

Overview II Non-market policies Not confided to usual countries – Venezuela, Argentina and Bolivia Countries such as Ecuador and Nicaragua pursuing questionable policies During the commodity boom, presidential popularity ratings increased, only to start a decent in 2009 Looking ahead unsustainable policies may Precipitate political change in Venezuela Increase risk of protests and riots in other countries.

Social Development I Revenues during commodity super-cycle created room for governments to expand their social policies Direct payment programs Mexico, Brazil Together with high economic growth and employment increases In most Latin American Countries, these contributed to Growth of a middle class, and Poverty reduction Poverty declined in all countries except Colombia and Honduras between 2001 and 2013 In 2001 24% of the population lived on less than $4 a day, dropping to 21% in 2013 Sharpest declines in Argentina, Bolivia and Paraguay Middle class expanded to 30% of region population from 19% in 2003

Poverty Reduction

Income Inequality Reduction Also a decline in income inequality for all Latin American countries with data Goes against international trend of increasing inequality Inequality still quite high by international standards

Populist Policies I In last 15 years a rise in populist regimes Kirchners in Argentina 2003-15 Hugo Chavez and Nicolas Maduro, Venezuela 1999 .. Populism hard to define. One attempt: People against elites who are depriving (or attempting to deprive) people of their rights, values, prosperity, identity or voice. Characterized by a strong focus on redistribution of income Another definition Approach to economics that emphasizes growth and income redistribution and deemphasizes the risks of inflation, deficit finance, and external constraints

Populist Policies II Populist are likely to result in macroeconomic imbalances May pose a risk to sustainable economic and political stability despite some short urn gains To establish if there has been a resurgence of populism must look at Key macroeconomic indicators Fiscal behavior of governments and Evidence of aggressive non-market policies

Populist Policies III When populist leaders come to power they start implementing programs aimed at Redistributing income Generating employment, and Accelerating growth In the short run the strategy works while rising imports contain the impact of the demand explosion on inflation When foreign exchange (FX) reserves run low, the economic strategy starts to collapses. As a result: Inflation increases for products in short supply Budget balance worsens as cost of subsidies on wage goods and FX increase Expect populist regimes to have a high budget deficit, current account deficit and inflation

Populist Policies IV Turns out no clear-cur relationship between these three variables. Venezuela with a large oil sector has managed a current account surplus combined with rampant inflation and a large budget deficit Argentina has high inflation but uses FX controls to control imports Uruguay, not known for pursuing populist policies does not perform well on macroeconomic indicators Many other factors influencing macroeconomic variables Capital stock Natural resources Terms of trade Need to look at fiscal behavior

(2001

Fiscal Behavior I For most LA countries growth of (real) government spending has been consistently higher than GDP over the last fifteen years, 2001-15 Countries with the most high-profile populist leaders are also countries that have most dramatic relative increase in government spending – Venezuela, Argentina and Bolivia

Fiscal Behavior II Another check – see of a strong link between electoral and fiscal cycles When governments rely on pre-election handouts to appeal to voters they are arguably more populist There is evidence expenditure grew especially fast during election years In years that an election takes place on average a strong fiscal expansion of around 1.4% of GDP between 2002 and 2014 No evidence of such a cycle before 2002 – suggests commodity price boom might have enabled populist leaders.

Non-Market Policies and Business Climate I Another sign of populism -- aggressive non-market policies Risk of expropriation of assets by national governments High in Venezuela, Argentina, Bolivia, Ecuador, and Nicaragua Best example expropriation of YPF in Argentina in 2012, but Venezuela and Bolivia have also nationalized mining companies Venezuela nationalized a supermarket because government felt it did not stock enough products (result of government price controls) Most countries score low on Property Rights Protection and Undue Government Influence

Risk of Expropriation

Property Rights Protection

Undue Government Influence

Political Stability After Commodity Boom I If commodity price growth has enabled governments to pursue more populist policies likely to have contributed to political stability in the short-run. Will stability be coming to an end now that external conditions have become ore challenging? Apparently

Political Stability After Commodity Boom II With commodity prices in the doldrums owing to the Chinese growth slowdown and the current oversupply in the oil market – does not bode will for political stability in the short term Political risk has increased in 40% of countries between the peak in commodity prices in 2000 and 2015

Conclusions Probably explains loss of Kirchner’s nominated successor in Argentina Venezuela, opposition big win in Congress over the socialists. Might have been a factor in Brazil Peru – a technocrat won last election