As part of this week’s Davos Blog Takeover, Frances Coppola reflects on the explosion of populist politics across the western word. Frances has been a supporter of the movement to reform economics and provides a valuable insight into the financial sector. However, her work goes beyond finance and she very quickly becomes an expert on a range of topics! It is clear that prescribing the wrong prescription to the current economic paradigm could make the situation worse, therefore Frances’ blog is extremely relevant. While populist politicians short-term answers appear to address the genuine concerns of millions of citizens, she traces the historical lessons that show how populist economics proves unsustainable in an interdependent world and ultimately hurts the very people it sets out to save.
- Contemporary populism leaves unanswered the major causes of political discontent, in favour of the intensification of fear and anger amongst the “left behinds”
- Anti-immigrant and protectionist rhetoric is an easy answer, and can meet with short-term economic success
- Ultimately, populist economics cannot work in a country that is not self-sufficient in goods; and history has shown that, in the end, it is the supporters of populism who pay the highest price when it finally fails
It is tempting to see the rise of populism in countries across the developed world as prefiguring a new golden dawn for those “left behind” by globalisation and automation. Austerity is over: welcome to the new world of expansionary fiscal policies aimed at those who are “just about managing”. But the reality is very different. Today’s populism is a chimera built on exclusion and hatred of those who are “not one of us”. And like all populist movements, it will end badly.
Today’s populism has its roots in the economic policies of the last three decades. Branko Milanovic has shown how low and middle-income people in developed countries have suffered income stagnation while low and middle-income people in developing countries, particularly in Asia, have seen their incomes rise to unprecedented levels. People have seen their incomes stagnate for years on end, while corrupt bankers have been bailed out and the wealth of the very rich has soared. Well-paid secure manufacturing jobs have disappeared, replaced by insecure poorly paid service work.
But it’s not really globalisation that is driving the populist movement. Fundamentally, this is a story of disappointment among low to middle-income people, who are angry that they are less well-off than they expected to be, that social and healthcare services on which they increasingly rely can’t meet their needs, and – above all – that their cultural values and their way of life are disappearing in favour of cosmopolitan city lifestyles and multiculturalism. Their anger is focused at foreigners, whom they see as stealing their jobs and crowding them out of their homes; at those who are poorer than them, who receive help from the state that they can’t get; city dwellers, particularly the young, whom they see as lazy and entitled; at the bankers and “fat cats” whose tax avoidance schemes they see as stealing money that should go into services for them. They want the borders closed, immigrants sent home, protectionist measures to prevent offshoring of jobs, and foreign aid stopped. “Charity begins at home,” is their mantra.
The populist response – easy answers, bad choices
Populist politicians are responding to this mantra. Strict immigration control, including the repatriation of illegal immigrants, is already on the agenda in the US and the UK. International trade agreements are being torn up: the UK’s likely “clean Brexit” would take it out of the European customs union as well as the single market, while the incoming Trump administration is threatening to withdraw the US from both NAFTA and the WTO. Non-tariff barriers to trade are already rising, and tariff barriers in certain sectors are being discussed, particularly to protect manufacturing jobs.
The Smoot-Hawley tariffs regime of the 1930s demonstrated beyond all reasonable doubt that trade protectionism does not bring prosperity. But we seem to have forgotten everything we learned from that terrible time. Already, global trade is declining, and global GDP growth is slowing. And the voices of those who advocate genuinely free trade are being drowned out by the angry crowd. “Free trade” no longer means a mutually beneficial agreement: it means “you do business with me on my terms, or I slap tariffs on you”.
The great economist Rudiger Dornbusch observed that when populism fails – as it always does – those it was intended to help end up losing the most. He was writing about Latin America, of course: but if there is one thing we learned from the Eurozone crisis, it is that the rules of international economics do not only apply to developing countries.
Dornbusch shows that populist policies do work – for a while. Expansionary fiscal policies and protectionism increase GDP, close trade deficits, bring full employment and raise working people’s incomes. But it doesn’t last. Countries can’t produce all their own goods: there is always something that has to be imported, and for that, foreign exchange is needed. Dornbusch observes that as demand grows, stimulated by expansionary policies, the economy starts to encounter bottlenecks – typically rising inflation due to domestic capacity constraints, and a growing shortage of foreign exchange. Populist governments tend to respond to this by doubling down on protectionist measures such as capital and exchange controls, while continuing with expansionary policies to keep their voters happy.
Unfortunately, this is entirely the wrong medicine. Protectionism results in shortages and rising inflation, while expansionary policies worsen the country’s fiscal position. The end game is currently being played out in Venezuela, where a severe FX crisis and hyperinflation is wiping out the effects of over a decade of populist policies intended to raising the living standards of the poor. Far from benefiting from those policies, Venezuela’s people will end up even poorer than they were before. It is a Latin American tragedy.
And it could all too easily become a global tragedy. Developed countries are not immune from FX crises and hyperinflation, and history shows that crises in developed countries can result in severe oppression of minorities and aggression towards foreigners. Populist politicians in developed countries are already exhibiting distressing callousness towards refugees from war-torn areas and certain minority groups in their own countries. When populism fails – as it inevitably will – this can only increase. The world seems set to become a crueller and more violent place.