Beware the economics of populism

Venezuela is probably the worst managed economy in the world today. It has the largest oil reserves of any country, accounting for around 18% of the world total and twice as much as the whole of Europe put together, yet its citizens suffer food shortages and a lack of access to basic medicine. In short, they live in a country whose economy is – to put it bluntly – a basket case. It should not be like this. The fact that it is can be attributed entirely to a policy of economic mismanagement, driven by a government which for the last 17 years has pursued a brand of socialism known as Chavismo, named after its initiator, former president Hugo Chávez. 

When asked in a recent TV interview what Venezuela must do in order to get its economy back on track, my first answer was “get rid of the government.” Chavismo is a ruinous policy which sought to build a mass movement of popular democracy in order to establish economic independence, equitable distribution of revenues and an end to political corruption. It has failed on every count. It is not popular; has failed to break the dependency on oil and has resulted in an even less equitable distribution of incomes than when the policy started. Meanwhile, Transparency International today ranks Venezuela 166^th out of 176 countries in its Corruption Perceptions Index, compared to 71^st in 2000. In short, Venezuela is a classic example of how not to run a populist policy.

But, I hear you say, this sort of populist nonsense only happens in third world dictatorships such as Venezuela or Zimbabwe – it would never happen here. And you would probably be right. But it is interesting to note that the share of electorates voting for populist parties in the so-called developed world is at its highest since the 1930s (see chart below). The chart was taken from a recent excellent study by Bridgewater Associates which is well worth a read (here) and which takes a look at how populism emerges, how it runs its course and what are the wider implications. As the report states, “populism is a political and social phenomenon that arises from the common man being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them.”

This all sounds very familiar after the events of the last year, and although neither Brexit nor the election of Donald Trump are expected to lead to the extreme outcomes associated with past periods of populist government, they do share certain similarities. Both were motivated by a certain degree of xenophobia and both to varying degrees involve elements of anti-free trade, as well as being highly nationalist campaigns. We have also seen some elements of this in the French and Dutch election campaigns in recent weeks.

The real concern is that populist agendas tend to do more economic harm than good in the long-run. One of the unsung economic populists identified by Bridgewater is Robert Muldoon, the New Zealand prime minister from 1975 to 1984. His policies promised a continuation of New Zealand’s generous social welfare programs and protections, which resonated with elderly and rural voters, who helped bring him to power. His policies, which included setting up a pension system described as “the most generous universal pension scheme ever introduced in any country in any era,” came against a worsening domestic and global economic backdrop. The upshot was that New Zealand was subsequently forced to backtrack and introduced a major restructuring programme in the mid-1980s (the Rogernomics programme) which caused a lot of pain in order to reverse the excesses of Muldoon's policies.

Donald Trump’s threats to impose barriers to countries wishing to trade with the US threaten to do more harm than good. Brexit, if not handled correctly, will cause much greater long-term damage than many of its current proponents believe. Whilst we may not be about to go along the same path as Venezuela, the historical evidence makes it clear that politicians who make promises their economies cannot keep do us all a disservice.