18 January 2018

Populism is a package deal


In a recent column for Project Syndicate, Dani Rodrik decries authoritarian populism – which “stifles political pluralism and undermines liberal democratic norms” – as a menace to be avoided at all costs. But he goes on to argue that economic populism is “occasionally necessary.” He is right about the first point, but badly mistaken on the second.

Rodrik, one of the most original and perceptive economists of our time, claims that while restraints on the power of the executive, abhorred by authoritarian populists, need to be defended, similar obstacles in the area of economic policy – in the form of “autonomous regulatory agencies, independent central banks, or global trade rules” – have gone too far and become hijacked by special interests, fostering an anti-establishment, populist backlash. It follows that a dose of economic populism might be exactly what Western societies need to get out of their current political crisis.

What this argument misses is that the separation between the two varieties of populists is rarely neat. One does not need to fully subscribe to the views expressed by the economist Friedrich von Hayek in his 1944 book, The Road to Serfdom, who argued that economic interventionism leads to tyranny, to recognize that the dismantling of constraints on economic policy-making and the weakening of independent judiciary, free media, and political competition are mutually reinforcing. Populism, in other words, is a package deal.

After all, Viktor Orbán’s rise to power in Hungary was facilitated by his populist moves catering to domestic economic interests. These include the retroactive retail surtax introduced in December 2010, based on turnover and disproportionately hitting foreign-owned businesses; the creation of a state tobacco monopoly with the purpose of distributing retail licenses to party supporters, and the nationalization of private pension fund assets to plug a hole in the country’s public finances.

The Polish experience has been similar. There, the seizure of pension fund assets in 2014 predates the arrival of the Law and Justice Party (PiS) in power, yet helped to push the Overton window in a populist direction. By now, the PiS government has renationalised large portions of the banking industry, introduced a new entitlement scheme, Family 500+, adding to the country’s structural deficit, and lowered the retirement age.

Given Poland’s economic challenges – a declining population, sluggish productivity growth, and low savings and investment rates – such measures are going to be costly in the long term. Meanwhile, the state-led consumption boost has helped to coalesce support for the PiS government as it tightens its grip over the country’s judiciary, weakens the oversight of elections, and purges public broadcasting of any dissenting voices.

And it isn’t just the Right: Syriza’s left-wing economic populism in Greece has gone hand in hand with attempts to shut down opposition TV channels and weaken judicial review. A similar pattern has been observed in countries of Latin America, a continent that has more experience than any other with economic populism. There, populist governments are associated with declines in performance on various metrics of institutional quality, government accountability, and the rule of law, such as the World Bank’s Worldwide Governance Indicators. Venezuela is the most extreme example.

If you were looking for evidence to the contrary, you could point to Brazil and Ecuador, where periods of populist economic governance did not lead to a distinct drift towards authoritarianism. However, policies cannot be judged solely by their performance when countries get lucky, but also by the outcomes they generate under less-than-ideal scenarios. More often than not, the lack of restraint in economic policy-making has been entangled with an overall authoritarian penchant of populists.

There is another problem with Rodrik’s defense of economic populism: it is a solution in search of a problem. To be sure, that is not to say that the constraints imposed on economic policy-making through delegation, trade treaties, and formulation of explicit rules to bound political discretion are beyond reproach, especially in areas where we have seen regulatory capture, such as intellectual property and financial regulation.

However, a significant part of the Eurosceptic backlash seen in the eurozone was fueled by the perceptions that existing rules – particularly the no-bailout policy embedded in European treaties – were being openly violated. The founding of Alternative for Germany and its initial surge in the polls were a direct response to emergency measures that were seen letting profligate governments on the Eurozone’s periphery and their lenders off the hook. The initial momentum for the Tea Party movement in the United States too came from the perception that bailouts to the financial industry were violating the legal and constitutional constraints on what the federal government is allowed to do.

To be sure, the EU’s democratic deficit, namely the fact that the bloc lacks transparent, accountable mechanisms to make consequential, politically charged decisions is itself an important part of the problem. But that problem is not going to be remedied by cheering on politicians to do whatever seems popular at the moment, regardless of long-term consequences. Instead, it will require institutional reform – devolution of some of the EU’s powers, a strengthening of its political accountability, as well as more credible rules guiding the EU’s single market, public deficits and management of financial risk.

Just as in the 1930s the political fallout from the Great Depression was not neutralized by the reversal to protectionism and economic short-termism, the flaws plaguing the EU and the global economy are not going to be fixed by encouraging politicians to pursue harmful economic policies. It is singularly irresponsible to suggest otherwise.

Dalibor Rohac is a research fellow at the American Enterprise Institute