How populism harms prosperity: Unified populist rule reduces investment, innovation, and productivity

This paper explores the long-term economic consequences of unified populist governments, where populist executives govern alongside legislative majorities. We find that such regimes significantly reduce a country’s real per-capita income growth for over a decade before a gradual return to pre-populist economic conditions. They do so through inefficient, off-balance-sheet redistribution using financial repression, which damages financial intermediation and private investment and helps populists expand the size of government while crowding out their ability to invest in infrastructure, basic science, and R&D. We find strong evidence that these populist policies stifle innovation and productivity; the reason is that they precipitate big declines in private investment, R&D spending, researchers per capita, and patent generation. Using autoregressive distributed lag (ARDL) dynamic panel models estimated via system generalized method of moments (GMM), we demonstrate robust causal linkages between populism and these hallmarks of dynamic inefficiency. Furthermore, this paper introduces a novel measure of populism, identifying instances where populists control both the executive and legislative branches.