Monthly Archives: October 2017

Economic Consequences of Populism

Who is the true populist: Bernie Sanders, who promises single-payer health care and college without tuition, or Donald Trump, who campaigned on a promise to “drain the swamp”?  Jeremy Corbyn of the UK’s Labour Party, who wants to nationalize public-sector firms, or Marine Le Pen of France’s National Front, who wants to take France out of the Eurozone? And what would be the consequences of their policies?

To answer these questions requires first an understanding of populism. One definition of populism, such as the one found here, refers to it as policies for the “common people.” Populism, therefore, divides the world into two groups: the good “common people” and the evil “them.” “They” deprive the “people” of the rewards of their hard work and exclude them from the political process. But just who are these “common people”? And who are not?

Dani Rodrik of Harvard’s Kennedy School in one recent paper and a second coauthored with Sharun Mukand of the University of Warwick proposes an analytical framework for understanding the different strands of nationalism. Rodrik and Mukand suggest that populist politicians obtain support by exploiting divisions within a society, and envisage two kinds of separation. The first is an ethno-national split, such as occurred in Europe in the 1930s and again in modern-day Europe, and is usually associated with right-wing movements. The second is a partition by economic class, as seen in the U.S. in the 1890s, Peron’s Argentina and contemporary Venezuela, and is often found in left-wing organizations.

Under this classification, Trump and Le Pen are nationalist populists while Sanders and Corbyn have a class-based agenda. Once we understand this demarcation, we can see they will advocate different policies. The nationalist populists are suspicious of all foreign contact. They regard trade pacts as zero-sum transactions: one side to an agreement wins, and the other loses. Similarly, immigrants hurt native workers and impose fiscal costs on society. These populists are in favor of government expenditures for the “people,” but not anyone else. They favor domestic firms and will support measures to benefit them.

Class-based populists, on the other hand, are concerned about the “workers,” who includeindustrial laborers and farmers. They are suspicious of property owners and the financial sector. They seek to use taxes and other measures to redistribute property. They may also advocate government control of the economy through public ownership or the use of licenses and other means to guide production. They can grant subsidies for the purchase of basic needs, such as food or fuel. They will oppose foreigners if they are seen as allied with domestic financiers.

Initially, populist measures of either type may lead to prosperity, as more domestic and/or government spending leads to more jobs. But less efficient firms are subsidized, which increases costs. Over time these costs must be paid, as well as those made directly to households. If the bond markets are reluctant to finance government budget deficits (except at very high interest rates), the government may turn to the central bank to finance its expenditures. But the resulting inflation leads to more spending and monetary creation. A country with a fixed exchange rate, like several in Latin America, eventually runs out of foreign exchange. The resulting crises are blamed on “foreigners” or “capitalists,” and eventually may lead to a collapse.

Rudiger Dornbusch and Sebastian Edwards (currently at UCLA’s Andersen School of Management) wrote an analysis of the populist policies of Latin American governments that appeared in the Journal of Development Economics in 1990 (see working paper here). In their view:

“We mean by “populism” an approach to economics that emphasizes growth and income redistribution and deemphasizes the risks of inflation and deficit finance, external constraints and the reaction of economic agents to aggressive non-market policies.…populist policies do ultimately fail; and when they fail it is always at a frightening cost to the very groups who were supposed to be favored.”

The most prominent manifestations of President Trump’s nationalist populism have come in the negotiations over NAFTA  and the administration’s refusal to abide by the decisions of the World Trade Organization. In addition, there are its policies that affect illegal immigrants and its support of measures to cut legal migration. None of these will lead to an immediate crisis in the U.S.  economy, but they will have long-run consequences for the growth of the economy. Moreover, the law of unintended consequences has a wide reach, The Trump administration may find that retaliation can sting.


2017 Globie: “Grave New World”

Once a year I choose a book that deals with an aspect of globalization in an interesting and illuminating way, and bestow on it the “prize” of the Globalization Book of the Year (known as the “Globie”). The prize is strictly honorific—no check is attached! But I enjoy drawing attention to an author who has an insight on the process of globalization.  Previous winners are listed below.

This year’s Globie goes to Stephen D. King for Grave New World: The End of Globalization, The Return of History. King is senior economic adviser at HSBC Holdings, where he was chief economist from 1998 to 2015. He is the author of Losing Control: The Emerging Threats to Western Prosperity, which won the Globie in 2010, and therefore is the first two-time winner.

In the new book King addresses the current status of globalization, and how it may evolve in the future. In the book he makes six claims:

  • Globalization is not irreversible;
  • Technology can both enable globalization and destroy it;
  • Economic development that reduces inequality between states but reinforces domestic inequality creates a tension between a desire for gains in global living standards and social stability at home;
  • Migration in the 21st century will affect domestic stability;
  • The international institutions that have helped govern globalization have lost their credibility;
  • There is more than one version of globalization.

King is particularly perceptive in pointing out alternative viewpoints to those usually espoused in Western media. In Chapter 7, for example, he gives six different perspectives on how globalization has affected economic welfare. He begins with the Western version, and follows it with the Chinese, Ottoman, Russian, Persian and African versions. Each region sees history filtered through its own experiences and comes to very different conclusions on the benefits and costs of globalization.

Differences over globalization also exist within Western nations, as recent elections have shown. King points out that supporters of Donald Trump in the U.S. were concerned about immigration and terrorism, while Hilary Clinton’s supporters were worried about inequality. Nor are these concerns confined to the U.S., as the Brexit vote revealed. Part of these divisions are responses to the hardships and dislocations caused by the global financial crisis. But whatever the source, this upheaval hastens a retreat by Western countries from global engagement.

While the Western economies are withdrawing from international commitments, others are actively pursuing their own global agendas. China’s Silk Road initiative, for example, extends its trade ties with central Asia and Europe. The Asian Infrastructure Investment Bank bolsters China’s neighbors’ capacity to engage in more transactions. At some point India will undoubtedly respond with its version of an Asian initiative.

King readily admits that his view of the future is “unsettling.” Our faith in technology and markets has not led to the widespread adoption of Western values or shared prosperity. The challenge is to formulate international mechanisms that mitigate market failures, including inequality. A vision based on every nation following its own interests is not likely to achieve that goal.

Previous Globie Winners

2014    Martin Wolf : The Shifts and the Shocks: What We’ve Learned–and Have Still to                                                    Learn–from the Financial Crisis

2015    Benjamin J. Cohen: Currency Power: Understanding Monetary Rivalry

2016    Branko Milanovic: Global Inequality