The economics of populism is failing in Latin America

Anger at the perceived failure of the political class has driven a wave of populist leaders but their lack of economic success is worrying for the region’s future.

Expert comment Updated 7 July 2021 Published 13 April 2021 4 minute READ

The spectre of populism – both of the left and right variety – has hung over Latin American politics and economics since the 19th century but, for the last two decades, a new wave of populist movements and leaders has developed as a result of ongoing economic dislocation and popular anger at the political class.

The spectre of populism has hung over Latin American politics and economics since the 19th century. 

Although too early to assess the impact of the recent elections in Ecuador and Peru on populism’s future in the region – with 18 presidential candidates in Peru only narrowly being winnowed down for a 6 June 2021 run-off with the two leading candidates boasting just a combined total of around 30 per cent of the vote – for many countries in the region the long-term effect of COVID-19 on economic growth and social mobility casts a dark shadow.  

For long-term political stability and economic growth in the region, this is not good. Even before the pandemic, conditions were fertile for the rise of populist movements as leaders such as Hugo Chavez in Venezuela, Rafael Correa in Ecuador – whose ally Andrés Arauz in a surprise result lost the 11 April second-round election to conservative businessman Guillermo Lasso – Brazil’s Jair Bolsonaro and Mexico’s Andres Manuel Lopez Obrador (AMLO) all rode a wave of social distrust as established party systems collapsed in their countries. 

Insufficient growth to support social mobility

Latin American economies were already flatlining prior to COVID-19 as, according to the International Monetary Fund (IMF), their average growth was only one per cent in 2018 and zero per cent in 2019. Such low rates of growth are insufficient to sustain gains in social mobility from the early 2000s when, due to Chinese demand for raw materials, the region grew on average by 5.1 per cent from 2004-07, and more than 50 million people joined a fragile middle class, albeit under arguably a low-bar definition.

With the arrival of COVID-19, the region’s economy contracted on average by 8.1 per cent in 2020 and is predicted to grow by only 3.6 per cent in 2021 although, given ongoing rates of infection and struggles in accessing and delivering vaccines in all countries but Chile, even that figure may be in doubt.

The UN Economic Commission on Latin America and the Caribbean (ECLAC) estimates Latin American economies may not truly recover until 2023, with more than 20 million people in the region joining the ranks of the poor from 2018 to 2020, and those in poverty now making up more than 33 per cent of the population.

Added to these dismal numbers and the long-term scarring from this past year is that more than 53 per cent of the region’s workforce labours away in the informal sector – a population with little access to social insurance and job security and whose economic survival depends more than most on economic volatility.

Running in parallel to these economic dire straits, but only in part caused by them, are troubling levels of declining support for democracy and increasing popular distrust for the state among Latin America’s electorate. According to surveys by Vanderbilt University’s Latin American Public Opinion Project (LAPOP) conducted in 2018-19, on average only 39.6 per cent of Latin American citizens say they are satisfied with their current democracy. That includes a low of 28 per cent satisfied in Peru, 41.7 per cent in Brazil and 46.4 per cent in Mexico — all countries with important elections in the next two years.

Lack of trust in institutions 

Behind this decline is a lack of trust in the institutions of government and democracy. According to the same surveys conducted in the same time period before the pandemic struck, only 39.4 per cent of the citizens in 18 Latin American countries trusted their national parliament, only 45.5 per cent trusted their elections and a measly 28.2 per cent had confidence in their political parties.

In light of this, it should not be surprising that 23 per cent of Latin American citizens say they would be willing to support an executive shut down – or ‘self-coup’ – up from 14.8 per cent only eight years ago. This does vary significantly country to country as Peru tops the list with 58.9 per cent of citizens stating they would support a presidential dissolution of the national legislature, whereas in Mexico, that number is 28.1 per cent and 22.4 per cent in Brazil.

These conditions have created fertile ground for the collapse of traditional political parties and the arrival of outsider candidates. Since 1998, a wave of populist leaders promised to toss out a corrupt political and economic class and replace it with direct, personal contact with claims to represent the popular will in government.

These conditions have created fertile ground for the collapse of traditional political parties and the arrival of outsider candidates.

None of this demands any specific ideological affiliation or economic or social platform. From the far-left, 21st century socialism of Chavez to the folksy, dishevelled charm of AMLO, to the right-wing, racist machismo of Jair Bolsonaro, what defines these leaders most is the personal concentration of power and a view that those who oppose them – whether politicians, the media or civil society – are not critics but heretics – enemies of popular will. 

As a group, their economic policies have been hugely different. In Venezuela, Chavez’s nationalization of private oil companies, his breaking of the independence of the semi-state oil company PDVSA – and the central bank – and his profligate spending broke the state and plunged the economy into its current humanitarian crisis. In Ecuador, Correa’s economic tendencies were controlled by his country’s use of the dollar as the local currency but still led to an explosion of social spending which almost broke the bank and sweetheart deals for Chinese energy investment and loans.

In contrast, until discovering the popular benefits of large cash stimulus packages in 2020, Bolsonaro was guided more by the market orthodoxy of his economy minister Paulo Guedes. But in the run up to what will likely be a close 2022 presidential election, he appears unlikely to resist turning on the tap of public spending to boost his support. In Mexico, to the surprise of many, the traditional leftist AMLO has been a careful steward of public funds during the pandemic, leading one commentator to speculate that as a child of a shopkeeper, the Mexican president was raised to be a ‘peso-pincher’.

No tolerance for financial checks and balances

Despite such different fiscal and monetary policies, what populist leaders do share is likely to spell economic trouble in the medium and long-term because, irrespective of economic orientation, all tend to have little tolerance for checks on executive power including the independence of monetary policy, central banks, regulatory bodies and independent or semi-independent parastatals.

The reasons for this go beyond simply temperament. Increasing executive discretion over regulations and monetary policy and granting themselves access to the profits and personnel of public businesses gives presidents more tools to build popular support and reward allies through rents, expansive fiscal policy, public contracts and employment. This is a pattern which holds true across all the recent crop of populist presidents as well as previous ones marking the region’s political history.

It is vital to examine […] not just the current crop of leaders in Venezuela, Brazil and Mexico but also those that may yet come.

Chavez’s breaking of his central bank’s independence and raiding of PDVSA’s operating budget is not so dissimilar from Bolsonaro recently sacking the president of Brazil’s semi-private flagship oil company Petrobras and replacing him with former military officer Joaquim Silva e Luna – a key ally of the president – as well as gutting the state body Ibama which aims to protect Amazon forests from farmers, illegal miners and loggers – though the Brazilian president has so far respected Central Bank independence. These go alongside AMLO’s efforts to root out private investors in favour of Mexico’s national oil company PEMEX, the environmentally destructive plan to build refineries in his home state of Tabasco, and recent weakening of the federal electrical commission. 

While these actions may not trigger the immediate economic collapse witnessed in Venezuela, if these trends continue in the long-term, they will destabilize the region’s economy by disincentivizing both domestic and foreign investment while creating conditions for unproductive and unprofitable investment and hiring and widespread corruption. These policies also discourage economic diversification, concentrating the economy on the easy-hard currency of exploiting and exporting raw materials full of inherent risks and underdevelopment.

Importantly, the economic policies characterizing populists in Latin America are more subtle and less ideologically obvious than others but still deserve close consideration and scrutiny given how they will impact future growth in the region. It is vital to examine their approaches, and not just of the current crop of leaders in Venezuela, Brazil and Mexico, but also those that may yet come in the wave of elections throughout 2021 and 2022.