Digging Deeper into Populism

TL;DR summary: The one thing most populist governments studied had in common was a declining protection for property rights. Focus there next time.

Nicolás Cachanosky explained that populism in five Latin American countries had led to a rapid deterioration in their economic freedom, intimating that this also led to a relative drop in living standards compared to other South American countries. Given that the two primary economic strategies of populism are control and spend (Dornbusch and Edwards 1991 quoting Carbonetto et al. 1987), it would be shocking if a populist government did not reduce economic freedom. That’s the idea! However, there is more we could learn about how populism reduces economic freedom by doing a little more to identify exactly what it was that populist governments did. First, I think it’s useful to go a little further back, to compare how trends were looking before* populism (say by 1991) to how those trends changed with the election of a populist government. Second, I’m going to take a more careful look at how and why economic freedom decreased.

It is funny to me that when Cachanosky’s response to his first commenter is to ask for a definition and a measure before being willing to debate a correction; that suggests he really ought to have been more careful to define populism in his post. In fairness, that’s a tall order*: much of the literature on populism has been trying to define it and there is still no consensus as far as I can tell. Are we focusing primarily on increasing statism, whether it is called populism or progressivism or socialism or cronyism? Or is there something special about the populist brand of statism that we should be looking out for? To the extent populism is a “power to the people” movement, Libertarianism itself could try to appropriate the populist brand and claim they are taking power back from the government for the people! I don’t think this is what Cachanosky has in mind. :). I tend to think that he is focused mostly on statism and for the purposes of his post, it doesn’t matter whether it’s populism or socialism that caused it, so please assume when I say “populism” hereafter, I mean increased state control over the economy.

Even given that, populism/statism exists on a continuum. There is a marked difference between a determined populist government that nationalizes wide swathes of an economy rapidly in order to redistribute riches to the common people and someone in an unnamed developed country who uses populist rhetoric to get elected and keep his base happy only to turn around once in office and enact largely pro-business deregulations and strengthen conservative social mores.

Because of this, it’s important to make distinctions between the 5 countries in question (Argentina, Bolivia, Brazil, Ecuador, and Venezuela). To demonstrate that, let me focus on Argentina and Brazil. Mueller and Mueller (2012) contrast Brazil and Argentina’s responses to the global food price crisis in 2006-08, during this populist period in both countries. There have been very few checks and balances on executive power in Argentina, allowing the Kirchners to enact “opportunistic price controls and intrusive export bans, generating significant discontent and investment disincentives” (pg 3). In Brazil, the checks on the presidency to prevent a repeat of the late 80s/early 90s inflation led to “the surprising conversion of President Lula once in office in 2003, reneging the leftish policy agenda his party had defended for years in the opposition, only to continue the fiscally disciplined macroeconomic policies of his predecessor” (pg 5). These kinds of difference are very important to understand what happens and when and why.This table shows how Heritage’s Economic Freedom in the World survey ranked the five countries Cachanosky singles out as populist in 1995 when the survey started, the year when they elected a populist government, and 2015; I then add five other South American countries for comparison. 10 represents high economic freedom and 1 very low freedom. The astute reader will notice that I am using the raw scores rather than country rankings as Cachanosky does because I suspect it matters more for economic growth what happens within my country rather than thinking economic growth will collapse because a handful of other countries on other continents become more free while I stay put where I am: I will look worse by comparison, but not be worse.

Heritage Overall
1991 start 2015
Argentina (2003) 6.8 5.6 4.4
Bolivia (2006) 5.8 5.8 4.7
Brazil (2002) 5.1 6.2 5.6
Ecuador (2007) 5.7 5.5 4.9
Venezuela (1999) 6 5.6 3.4
Heritage overall
1995 2005 2015
Chile 7.1 7.8 7.9
Colombia 6.5 6 7.2
Paraguay 6.6 6.1 6.8
Peru 5.7 5.3 6.1
Uruguay 6.3 6.7 6.9

To delve into the Argentina/Brazil comparison again, the survey shows Argentina scoring markedly higher than Brazil in 1995. This situation had already reversed itself by 2003 and the start of populism. Since then Argentina has continued to fall rapidly while Brazil has turned reversed its progress. Delving deeper into those numbers, Argentina has become markedly less free in terms of almost every category Heritage measures (respect for property rights in 2001-2003, government integrity 2006-2008, tax burden, government spending since 2011, business freedom in 2002, and monetary, investment, and financial freedom in 2003), while Brazil’s primary sin was an increase in spending in 2006 and an increase in taxes to pay for it. That’s it. This shows a real deterioration in Argentinian freedom before populism, a trend only continued and exacerbated by the Kirchners, while Brazil has shown both improvement and decline, with a much different, constrained form of policy making. Argentinian populism and Brazilian are far from the same phenomenon.

In Bolivia and Ecuador, property rights fell in 2001 and investment freedom by 2005 before populism in either country and both slid down steadily after electing a populist government; both countries have improved in government integrity, taxes got worse in Ecuador in 2008 with spending increasing massively in 2010, and financial freedom worsened after populism started. Venezuela saw the largest decrease in respect for property rights right after electing Chavez and again in 2008. In contrast to other countries, Chavez initially reduced government spending and kept taxes roughly constant, with spending not increasing again until after 2008. Business and financial freedom declined steadily, investment freedom plummeted in 2004, and monetary freedom only declined in 2014.

We see then five rather different patterns, even though most of them saw the same sort of decline of 1.2-1.4 points. The key feature in all but Brazil is the decrease in respect for property rights shortly after the election of a populist government. Spending also tends to be higher in these five countries, though all happened during the global food price crisis and the US/EU financial crisis when spending also increased by many non-populist countries as well. Otherwise, there is very little in common among the five countries, with some embracing freer trade and others fleeing it, some cracking down on monetary and financial freedoms with others largely ignoring them. Our five ‘control’ countries saw an improvement in economic freedom from 2005-201, particularly in Colombia.  Colombia and Peru reduced their respect for property rights in 2002, but later repented; Paraguay has not held property rights in even modest esteem since 1998.

All of this suggests the place to look in future research is to the importance of declining respect for property rights among populist governments as a driver of economic freedom and economic growth.

And that brings us to the second of Cachanosky’s points – that this drop in economic freedom in those five countries led to shrinking economies compared to other economies in the region. First off, to be clear, all five of these populist economies experienced rapid economic growth during the time period in question, and this economic growth was much higher than the economic growth enjoyed in the decade before populism started. This would lead pro-populists to conclude that populism was actually quite good. Cachanosky admits that even though Argentina fell farther in the economic freedom rankings than its peers, its GDP/capita actually increased. He excuses this as being “largely explained as recovery after the 2001 crisis and by consuming capital stock, not as an expansion of potential output.” Unfortunately for his story, Argentina’s GDP/capita in terms of real USDollars not only surpassed its pre-crisis level (around $12300 in 1998), but rose to $17500 – a 42% increase during its populist period. (All numbers from www.gapminder.org are PPP$ inflation-adjusted.) In every single case he cites, GDP/capita rose while the headcount poverty rate fell dramatically.

However, compare their growth to the five control countries, and compare the time period before and after in each case:

GDP/cap (PPP$) Growth poverty (% below $3/day)
1991 start 2015 91-start start-15 1991 start 2014
Argentina (2003) 9330 10300 17500 10.40 69.90 3.9 19.1 4.3
Bolivia (2006) 3850 4370 6150 13.51 40.73 30.4 32.4 12.7
Brazil (2002) 10300 11600 15400 12.62 32.76 35.8 24.5 7.56
Ecuador (2007) 7690 7810 10800 1.56 38.28 36.5 32.9 10.2
Venezuela (1999) 16100 14200 15800 -11.80 11.27 N/A N/A N/A
GDP/cap (PPP$) Growth poverty (% below $3/day)
1991 2003 2015 91-start start-15 1991 2003 2014
Chile 9750 15500 22500 58.97 45.16 N/A N/A N/A
Colombia 7780 8680 12400 11.57 42.86 22.7 26.6 13.2
Paraguay 6040 5870 8040 -2.81 36.97 7.9 19.4 7
Peru 5290 6880 11500 30.06 67.15 33.9 27.2 9
Uruguay 10100 11500 19900 13.86 73.04 2.1 5.2 1.3

The 2003-2015 period was good across the board in South America, with most growing at least 30% more from 2003ish-2015 compared to 1991-2003. Similarly, poverty rates fell markedly from 2003-2014 in every country for which I have Gapminder data. So the claim is not that populism resulted in negative economic growth. The issue is that the average growth in the non-populist countries was around 1% per year higher than in the populist countries. Thus, to the populist-supporter who points to the high growth of Argentina et al as proof that populism works, the response is that growth was even higher in their non-populist neighbors and poverty is lower in them as well.

Now the unfortunate thing for drawing a clear causal interpretation from these correlations is that economic growth was also higher in the non-populist countries in the before period as well, perhaps due in part to having higher economic freedom to begin with. Growth in the freedom-preserving countries was slightly more than 1% per year higher, and that is driven predominantly by Chile. If Chile had had a more average 11-13% growth during that time period, we would be able to show more conclusively that the economic growth gap increased after populism. So, really, the claim that populism caused a lower economic growth in those countries doesn’t hold up very well – economic growth was lower in those countries before populism as well. It may well be that economic growth would have been higher in Argentina, Bolivia, Ecuador, and Venezuela had they maintained or improved their respect for property rights, but the raw data doesn’t tell us that without significantly more controls and doing some proper regressions.

* – One of the problems of this exercise is that to get “before” populism, you need to go back a hundred years or so. Ah well.


2 thoughts on “Digging Deeper into Populism

  1. Nicolas: I am sorry but I am now confused by your response to Watson. The graph of changing ratios of each country’s GDP to regional GDP that you provide in the response shows what I think are fairly flat lines. In my days, this meant that the ratios did not change during the period of populism. Too bad, it’an ingenuous measure! Correct me if I am wrong, of course. PS Perhaps if you changed the units, I would see what I did not see.

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