The Macroeconomics of Populism in Latin America.

• Author: Li, Jane-Yu Ho

The papers collected in this volume are research products from a project organized by the National Bureau of Economic Research. The papers note that macroeconomic instability has dominated the economic history of Latin America in the past century. Some of this instability has been exacerbated by the repeated adoption of the populist policies defined in this volume. The project attempts to answer the question of whether the repetition of these policies is due to ignorance about the mechanics (and hence the consequences) of deficit financing or to a deliberate policy choice pressured by the general prevalence of a highly skewed income distribution in this region.

The first part of the book contains three chapters that deal with the central themes. In chapter 1 the editors describe the economic populist paradigm in four phases of economic conditions characterized by strategies emphasizing demand expansion, wage increase, price control, and import substitution. Various populist policies aimed at income redistribution all ended with similar results: domestic shortages, hyperinflation, budget and balance-of-payment deficits, currency overvaluation, and capital flight. These problems made the economy unsustainable and eventually hurt the poor more.

It is particularly useful for the editors to point out some of the overly optimistic (and sometimes erroneous) economic beliefs behind these policies. The beliefs are that (1) inflation can be halted by price control and overvaluation of the currency, counting on the utilization of the existing idle capacity and benefits from the economies of scale; (2) deficit financing of government is useful to boost the general demand level while disregarding the associated problems; and (3) foreign exchange constraint and capital flight do not matter.

In chapter two, Robert R. Kaufman and Barbara Stallings addressed the political aspect of Latin America populism. They note that the historical existence of commodity export oligarchies and related income inequality help to explain part of the pressure for implementing populist policies. (According to one measurement, this region's income inequality is 1.5 times greater than that in some Asian countries.) Kaufman and Stallings define populism with a set of economic policies designed to achieve some political goals. Their definition emphasizes the building of a coalition of labor and lower middle class business sectors having a domestic orientation, while excluding the...