Strategic redistribution: The political economy of populism in Latin America

Why do some countries in Latin America redistribute too much (“left-wing populism”), while others allow high levels of inequality to persist or even increase over time (“neo-liberalism”)? We argue that when a group's political influence is increasing in its wealth, there is a strategic motive for redistribution: by taking money away from a group, its ability to influence future policy is reduced. Populism arises when the poor respond to this strategic motive, while neo-liberalism results when the rich use their wealth to limit redistribution. Assuming that wealth increases political influence because it enables a group to stage a coup, we find that populism is both more likely and more extreme when the military is biased in favor of the rich. We conclude by discussing the policies of Hugo Chavez in Venezuela and Alberto Fujimori in Peru in light of our findings.