Latin American countries have had a history of recurring bouts of hyperinflation, which have been as severe as they have been frequent. It is widely believed that the overriding reason for this has been populist macroeconomic policies, especially ones by democratically elected regimes.

Populism has been a prominent feature of Latin American politics and economics. It is traditionally understood as a form of “personalistic leadership” that mobilized diverse popular constituencies behind statist, nationalistic and redistributive development models. A closely related concept is that of economic populism, which entails economic policies aimed at redistributing income and typically marked by fiscal indiscipline. Despite being regarded as leftist in nature, economic populism has been practiced by both left- and right-wing regimes in Latin America. The former aims to redistribute wages more equitably whereas the latter is closely linked to developmentalism wherein the government gives massive subsidies to businesses to enable them to grow and expand output and employment.

Policies usually involve increased wages for workers in both the public and private sectors, increased employment in the public sector, nationalization of industries, increased tax breaks and subsidies (to the private sector), and artificial valuation of the currency. Also, money creation in order to finance the increased government spending worsens inflation. Economic populism is seen as the main culprit behind hyperinflation in Latin American countries. Most political economists believe that the nature of populist politics is such that inflation is innate in a populist regime. However the populist experiences in Argentina, Chile, Bolivia, Peru and Venezuela contradict the proposed supposition and show that inflation is not inherent to periods of populist rule.

Evidence from the major Latin American countries mentioned above (post World War II) gives rise to a number of implications. Firstly, the correlation between political populism and economic populism is not clear cut. A populist government may or may not follow populist economic policies as demonstrated by the leadership of Menem in Argentina, Luiz Inacio “Lula” da Silva in Brazil, and Evo Morales in Bolivia who were all populist in the political sense but neo-liberal, or even anti-populist, in their economic policies. Hyperinflation is a complex phenomenon and cannot be tied deterministically to populism. If that were the case, then inflation would not occur under non-populist regimes. Not only did non-populist regimes exhibit inflationary trends in Latin America, but the highest levels of annual inflation in Argentina and Bolivia were under non-populist rules. Consequently, in the study of inflation in Latin America, it would be useful to study the kind of economic policies pursued by governments, rather than the political definition of the regime.

Should the argument then be that economic populism leads to hyperinflation? A close inspection of empirical evidence shows that the link between populist economic policies and inflation itself needs to be qualified. While economic populism may be expansionary-Keynesian and redistributive in nature, it can actually succeed in attaining short-run goals of improving social welfare without causing runaway inflation, under certain advantageous circumstances. If sufficient funds are available internally to finance the socialist welfare programs of populist regimes, then economic populism will not lead to hyperinflation, ceterus paribus. In Peru, Alberto Fujimori’s social programs did not exacerbate inflation, as they were financed internally by proceeds from privatization of businesses. Despite being a populist leader, his regime brought runaway inflation inherited from Alan Garcia’s time to single digits by 1999.

In addition, the timing of populist economic policies is also important when analyzing their impact. If these policies are implemented in a pro-cyclical manner, then by adding to inflationary pressures within an economy which is heating up due to its normal business cycle, the policymakers would be accelerating the rate of inflation. On the other hand, if such policies are undertaken in a counter-cyclical manner, then price volatility would be reduced or avoided. This is evidenced by Salvador Allende’s first year in office when he successfully lowered the inflation rate in Chile since economic activity was in recession but thereafter could not sustain this due to unavailability of funds which prompted seignorage. In light of this, we see that populist economic policies are not too different from the traditional Keynesian expansionary-fiscal policies wherein we also find problems of time-lags.

The success of these policies is apparent in the short run but they are unsustainable. Populist rulers should use populist macroeconomic policies in the short run and pull back towards neo-liberal, growth-oriented policies as soon as the economy shows signs of pulling out of depression. There is no reason to believe that hyperinflation cannot be avoided in this way.

So can populist rulers let go of redistributive and expansionary fiscal policies, given their political support among the masses and the prospect of losing office in the next election?

Prevailing socioeconomic conditions and the strength of political institutions in the country under focus will determine whether and with what ease the policymakers will be able to make a u-turn. Although Carlos Menem (of Argentina) and Fujimori came to office with multi-class popular support, they did not base labor as their core constituency. Lula in Brazil did, however, coming from the platform of Worker’s Party. Yet all three, especially Lula, were able to adopt fiscal austerity along with the neo-liberal policy of cutting social spending, thereby lowering inflation in their economies.

Therefore, to argue that the strength of populist elements will determine the ability of a populist leader to turn back on redistributive economic policies is inaccurate. A multitude of country-specific factors influence this transition. The important conclusion is that even if they come with a popular mandate, populist leaders can impose stabilization policies, if they are willing to do so. Inflationary redistributive policies can be reversed if need be, even though this may not be easy.

Lastly, populism on its own is not responsible for the soaring inflation rates in Latin America. Three other principal factors contributing to Latin America’s inflation-ridden economies are external debt, seignorage and income inequality. For Brazil, external debt has been the single most important factor since 1980. Brazil is also renowned for its high income inequality, which creates pressure on the government “to use inflationary taxes” even if they are not essentially populist. While each of these three factors may be present due to macroeconomic populism, none is exclusive to it.

To categorize all populist regimes as inflationary or economically volatile, is to overlook such cases which have proven to be otherwise and which demonstrate that inflation is not an inevitable phenomenon connected to political populism. The tendency for fiscal laxity undeniably exists but this can be preempted and even used effectively in the short run under feasible conditions. Political economists and populist policymakers can succeed in designing and implementing non-inflationary policies even within a populist political framework.

Sehar Sarah Sikander Shah

Sehar Sarah Sikander Shah completed her bachelor’s degree in economics at Lahore University of Management Sciences and is currently she is working as a program evaluator for the World Bank in Pakistan..