The Danger of Populism Macroeconomic Populism in Latin America
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Colaborador Externo Revista Republicana ISSN:Rosalvina 1909 -Otálora 4450 • núm.Cortés 9 THE DANGER OF POPULISM MACROECONOMIC POPULISM IN LATIN AMERICA. IS COLOMBIA THE EXCEPTION?* Rosalvina Otálora Cortés** ABSTRACT The result is an uncontrollable inflation and an economic crisis, which may explain the In recent decades, populism has regained instability and hyperinflation that Latin prominence in Latin America. It is expressed America has experienced. Colombia, in forms of government from left or right as curiously, throughout its history, is an it happens in Venezuela with Hugo Chavez exception to this rule, due to the indepen- and Alvaro Uribe in Colombia, as well as in dence of the institutions that manage mobilization of some sectors of the monetary policy and the barriers that implies population. for the executive. This ambiguous concept takes on different Key words: populism, populist macro- meanings. From the economic point of view, economic, fiscal policy, monetary policy, macroeconomic populism emphasizes growth economic policy, hyperinflation, classic through redistributive policies in the short hyperinflation, inflation, macroeconomic term to increase consumption, neglecting populism phases, stability, Latin America, macroeconomic balance, especially with Argentina, Chile, Peru, Venezuela, Colombia. regard to inflation and fiscal deficit. This paper argues that macroeconomic INTRODUCTION populism is not new and has been applied in Latin America repeatedly. With some During the last decade populism has once differences and at different times of again come to the center of the political scene economic history, the governments of Ar- in Latin America. It is expressed in two gentina, Chile, Peru and Venezuela, have different ways. The first is the traditional resorted to the use of fiscal, monetary and style expressed by the government, as in credit expansive policies and overvaluation Venezuela with President Hugo Chávez. The of the currency to accelerate growth and second way has origin in mobilization of the redistribute income. When applied there are population where might be a “latent popu- concerns about fiscal and exchange lism” which could become evident when this restrictions. population reach power. Two examples of Fecha de recepción 16 de octubre de 2010. Fecha de aceptación: 26 de noviembre de 2010. * This topic has been reflected on line Economy and Conflict and in the Social Protection and Conflict researching Group in Libre University. ** The author is Magíster in Political Studies of the Universidad Nacional of Colombia. She is Economist and Lawyer. She is currently the Director of Economy and Conflict and Researcher of Libre University. The author is grateful for the contributions realized by Claudia Yineth Hernández Bocanegra, student of Santo Tomás University. 173 The danger of populism macroeconomic populism in Latin America. Is Colombia the exception? Revista Republicana this type of populism are the cases of to the People’s Party, but since almost no “Piqueteros” in Argentina and “Cocaleros” movement or leader has acknowledged in Bolivia (Pinto, 2004). being “populist.” In current political language, the term has a negative connota- We are faced with a very “ambiguous tion, being closely associated with terms like concept”, when we talk about populism, “demagogia”, economic bounty, which which can be wide and inclusive. (Panizza, indicate economic or political irresponsi- 2009). It depends on what we want to bility. (Panizza, 2009, 9). emphasise. Then, from the point of view of the economy of a country- which is the subject Populism is a controversial concept, and of this article- populism males emphasis on agreements about what it means and who the growth by short term public policies of qualifies as a populist is difficult because redistribution in order to growth the politicians don’t want to identify with this consumption. These impact the macroeco- analytical category (Panizza, 2009, 9). With nomics equilibrium, especially inflation and the economic crisis of the late twentieth fiscal deficit. In this case we talk about century, characterized by external shocks, macroeconomic populism. (Dornbusch, 1997). among which are included the effects of the Asian crisis and the Swiss bankruptcy There are some cases where the classic (Paramio, 65), the dynamism that charac- populism regime can apply economic decisions terized the economies of Latin America in which benefit some people. There is a kind of the early years of the nineties (except for “distributive microeconomic” which can be Mexico, Argentina and Uruguay in 1995) led compatible with a “stable macroeconomic”. to a stalemate. This period was called the It could be the case of Menem in Argentina “five years lost” by ECLAC (Ocampo, 2000). or Fujimori in Peru. (Degregori, 2001). But macroeconomic populism is not a new Therefore, it rediscovered the importance of situation; it has been applied in Latin America institutions as a essential framework for the in different periods (Edwards, 2009, 33 y ss). proper functioning of markets (Paramio, 66). Macroeconomic populism uses fiscal, Above, it said to be the reason for the failure monetary and credit expansive policies and of the Washington consensus led to strong valuation of the currency in order to discussion on the idea of a shift to the left in accelerate the growth of the economic and Latin America. redistribute the income. These policies applied without fiscal and monetary However, there was a divergence between restrictions and the result is high inflation and political discourse, the position on economic crises as has occurred in the next ca- globalization and the interpretation of ses we are going to analyze in this article (Ar- democratic reforms and the role of gentina, Chile and Peru). These cases prove institutions (Paramio, 66). The only coinci- that the populism is the cause of the dence is the emphasis on social policy and hyperinflation rule and it can be seen as a cause the pursuit of a focused economic model, not of the hyperinflation and the macroeconomic only in growth, but social outcomes, which instability in Latin America (Edwards, 2009). has slowly degenerated into populism. Colombia, curiosly was the exception to the rule some years ago. METHODOLOGY THE RESEARCH PROBLEM For this article, there will be a comparative exercise of economic policy management, fis- The term populism was originally used in cal and monetary policy by the various 174 the United States in the mid-1890s, referring governments in Latin America in order to Colaborador Externo Rosalvina Otálora Cortés identify the use of economic tools for populist as Europe had been, but the same policies purposes. The selection of countries is done did not function because they were applied arbitrarily and corresponds to the accessi- in a very different context. (Krugman, 1997). bility of information on economic variables on the behavior of fiscal and monetary The origin of traditional European hyperin- policy. Similarly, we use simple graphic va- flation obeyed to external factors. After the riables such as inflation, unemployment, First World War, the European economies gross domestic product, credit, etc, when presented high budgets deficits which where available and at different times depending financed by means of the creation of on the country for analysis. currency. In order to stop the hyperinflation, there was realized an orthodox program or The idea is to study at the end the Colombian global plan of stabilisation, which generated case and draw lessons that allow us to credibility with the public and certainty that explain, first, the dangers of macroeconomic the Central Bank would not finance the populism; second, the relative economic budget deficit by issuing currency. stability experienced by Colombia in recent decades, in relation to neighboring countries. The European countries that faced hyperin- flation, the incomes only covered a small fraction of the total expenses of the country THEORETICAL APPROXIMATION and the collapse in the public incomes TO MACROECONOMIC POPULISM coincided with the increase of inflation (Olivera Tanzi Effect). (Krugman, 1997). In 1. Traditional European Hyperinflation addition, the hyperinflation phenomenon and Populism Hyperinflations in Latin was preceded by an excessive level inflation America tax (seigniorage). Undoubtedly, the key components of the integral programs of 1.1 Traditional European Hyperinflation orthodox policies were: The European economies had a hyperin- - The policies of stabilisation that were flation process during the twenties in diffe- adopted. rent countries (Austria, Germany, Hungary, Poland and Russia). The causes and conse- - The exchange rate which restored the quences of this phenomenon receive the convertibility of the domestic currency name of “traditional hyperinflation”. in terms of the dollar or of the gold and (Dornbusch, 1997). The same phenomenon the reduction of the budget deficit. occurred in Latin America during the eighties in countries such as Bolivia, Argen- 3.1.2 Classical Populism as a Cause of tina, Brazil and Peru; but exempting Bolivia Hyperinflation and Macroeconomic in these countries the causes had a different Instability in Latin America. nature to traditional hyperinflation. (Dornbusch, 1997). Hyperinflation in Latin America, with the exception of the Bolivian hyperinflation, - After the experience of the European which presented traditional characteristics-, countries, economists discussed different occurred in