Latin America: The Rise and Fall of Populism
In the latest edition of “Global Macro Shifts,” the Templeton Global Macro team explores Latin America’s failed experiments with populism and the important lessons those experiences have for the developed world. Here, Michael Hasenstab shares a condensed version of his team’s full paper on the subject.
Populism has been on the rise across a wide range of countries in recent years. While populism can mean different things to different people, we use the term to describe policies that promise rapid solutions to problems, often economic in nature, without the pain that typically accompanies more orthodox prescriptions. Traditional policy advice has been to address macroeconomic imbalances using a macroeconomic toolkit consisting, but not restricted to, prudent fiscal and monetary policies, openness to trade, deregulation and a movement toward greater global economic integration.
In the aftermath of the various global crises of the past decade, these traditional remedies are becoming dangerously unfashionable. This has been especially striking in some advanced economies. It contributed to the Brexit vote, where a majority of UK voters opted to take the country out of the European Union (EU) to limit immigration and re-establish a stronger degree of national control over policies and regulations. Populist and nationalist parties have gained popularity in several other EU countries, raising uncertainty for upcoming elections in 2017.
Populist elements have also been strong and vocal in the recent US presidential election on both the Republican and Democratic sides; they have advocated a more inward-looking and interventionist economic focus as well as a more isolationist approach to global trade, with proposals to impose high import tariffs, scrap or renegotiate trade treaties, and curb immigration. Sharp criticism of the North American Free Trade Agreement and of immigration from Mexico signaled a temptation for the United States to turn its back on Latin America. This would be damaging to the US economy, and especially ironic at a time when key Latin American economies are moving in the opposite direction, turning away from populist economic policies to embrace free-market and pro-business reforms.
We have analyzed the experience of Latin American countries over the last several years. We focused mainly on three countries that had embraced populist economic policies: Argentina, Brazil and Venezuela. The former two have recently reversed course, whereas the latter has not. We think comparing their experiences holds some valuable lessons for any policymakers currently at risk of being seduced by the sirens’ song of populism.
Of course, advanced economies are in a much stronger position than the countries covered in this commentary, in terms of both macroeconomic fundamentals and institutions. However, we believe that the economic consequences of misguided policies would be qualitatively similar. In a situation where the temptation of protectionist policies, in particular, is strong, we believe therefore that this analysis can offer some useful guidance. In addition, we underscore the potential attractiveness of investment opportunities in Argentina and Brazil and, more generally, of countries with solid, orthodox macroeconomic policies.
The Sirens of Populism
Exhibit 1 summarizes the experiences of four Latin American countries, three of which (Argentina, Brazil and Venezuela) were lured into the trap of populist policies, whereas one was not (Colombia). All of these countries were hit to varying degrees by the end of the commodity supercycle, and their ability to sustain their respective policy frameworks was tested—those that turned to populism were found wanting. Exhibit 1 to the right provides a snapshot of the kinds of measures deployed by the more interventionist governments.
In all three countries that followed populist policies, such policies have brought about significantly adverse consequences: Inflation rose to high levels, the economic system was severely distorted, productivity growth suffered, manipulation of the exchange rate combined with high inflation caused a significant appreciation of the real exchange rate (which undermined competitiveness), and in some cases public debt expanded rapidly.