1. NS4540 Winter Term 2018 Populist Policies
Europa brazil economy

2. 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 ( ) pursued populist policies in the form of
unsustainable macro-economic and
aggressive non-market policies

3. 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.

4. 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 % 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

5. Poverty Reduction

6. 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

7. Populist Policies I In last 15 years a rise in populist regimes
Kirchners in Argentina
Hugo Chavez and Nicolas Maduro, Venezuela
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

8. 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

9. 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

10. 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

11. (2001

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

13. 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.

14. 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

15. Risk of Expropriation

16. Property Rights Protection

17. Undue Government Influence

18. 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

19. 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

20. 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