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Latin America’s economic history seems to repeat itself endlessly, following irregular and dramatic cycles. This sense of circularity is particularly striking with respect to the use of populist macroeconomic policies for distributive purposes. Again and again, and in country after country, policymakers have embraced economic programs that rely heavily on the use of expansive fiscal and credit policies and overvalued currency to accelerate growth and redistribute income. In implementing these policies, there has usually been no concern for the existence of fiscal and foreign exchange constraints. After a short period of economic growth and recovery, bottlenecks develop rovoking unsustainable macroeconomic pressures that, at the end, result in the plummeting of real wages and severe balance of payment difficulties. The final outcome of these experiments has generally been galloping inflation, crisis, and the collapse of the economic system. In the aftermath of these experiments there is no other alternative left but to implement… a drastically restrictive and costly stabilization program. The self-destructive feature of populism is particularly apparent from the stark decline in per capita income and real wages in the final days of these experiences.
Would you cry if I told you that these words were written in…1990!?
It’s almost as though we need a whole new consensus to put an end to this bedevilled cycle once and for all…
Once in power, populist policymakers rapidly move to implement ambitious economic programs aimed at redistributing income, generating employment, and accelerating growth. Although each historical populist episode exhibits some unique features, it is still possible to distinguish four phases common to the vast majority of experiences:
Phase 1.-In the first phase, the policymakers are fully vindicated in their diagnosis and prescription: growth of output, real wages, and employment are high, and the macroeconomic policies are nothing short of successful. Controls assure that inflation is not a problem, and shortages are alleviated by imports. The run-down of inventories and the availability of imports (financed by reserve decumulation or suspension of external payments) accommodate the demand expansion with little impact on inflation.
Phase 2.-The economy runs into bottlenecks, partly as a result of a strong expansion in demand for domestic goods, and partly because of a growing lack of foreign exchange. Whereas inventory decumulation was an essential feature of the first phase, the low levels of inventories and inventory building are now a source of problems. Price realignments and devaluation, exchange control, or protection become necessary. Inflation increases significantly, but wages keep up. The budget deficit worsens tremendously as a result of pervasive subsidies on wage goods and foreign exchange.
Bitar (1986, chap. 5 ) portrays very clearly the Chilean government’s inability to control events, to shift from redistribution to accumulation: “It turned out to be very difficult to contain the forces unleashed in 1971. The sequential conception of redistribution followed by accumulation assumed that basic political and social conduct could be altered and popular expectations changed virtually instantaneously. In the next few months [early 19721it proved impossible to apply this thinking with the facility that had been hoped for.”
Phase 3.-Pervasive shortages, extreme acceleration of inflation, and an obvious foreign exchange gap lead to capital flight and demonetization of the economy. The budget deficit deteriorates violently because of a steep decline in tax collection and increasing subsidy costs. The government attempts to stabilize by cutting subsidies and by a real depreciation. Real wages fall massively, and policies become unstable. It becomes clear that the government is in a desperate situation.
Phase 4.-Orthodox stabilization takes over under a new government. More often than not, an IMF program will be enacted; and, when everything is said and done, the real wage will have declined massively, to a level significantly lower than when the whole episode began. Moreover, that decline will be very persistent, because the politics and economics of the experience will have depressed investment and promoted capital flight. The extremity of real wage declines is due to a simple fact: capital is mobile across borders, but labor is not. Capitaltan flee from poor policies, labor is trapped.
The ultimate dismantling is often accompanied by major political change, including violent overthrow of the government. The middle-class sanctions these developments because of the economic threat of populism. RosensteinRodan (1974, p. 7) has captured this middle-class “legitimization” of the coup in the crass expression, “Salvador Allende died not because he was a socialist, but because he was an incompetent.”
With the exception of Colombia – where populist macroeconomic policies have been largely absent during the last four decades – the episodes with populist economics in Argentina, Brazil, Chile, Peru, Mexico, and Nicaragua…have followed quite closely the four phases we identify above. Although the final outcome of these experiments was not always the total collapse and destruction of the economy (as in Chile, Peru, and Nicaragua, for example), in all cases there were disastrous effects for those groups who were supposed to be the beneficiaries of the policies.
[Hat tip: Garcia Banchs]