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The macroeconomics of populism in Latin America

  • Dornbusch, Rudiger
  • Edwards, Sebastian

By populism, this paper refers to an economic approach that emphasizes growth and income redistribution and deemphasizes the risks of inflation and deficit finance, external constraints and the reaction of economic agents to aggressive nonmarket policies. It analyzes two instances of populism - Chile under Allende and Peru under Garcia. These experiences are described in detail, not as a righteous assertion of conservative economics, but as a warning that populist policies ultimately fail, and always at a frightening cost to the groups they were supposed to benefit. This paper explores the question of whether some variant of populist policies could succeed. It suggests that populist policies could succeed if they stayed clear of foreign exchange constraints, emphasized reactivation for a brief initial period, and then shifted to growth policies. Most important, expansionary policies must reflect awareness of capacity constraints and must rely for financing on an extremely orthodox fiscal policy and rigorous tax adminsitration. The paper concludes by warning that IMF-style policies, unconcerned with growth of social progress, may establish financial stability in the short run, but inevitably open the door to yet another round of destructive reaction in the form of populist policies.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 316.

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Date of creation: 31 Dec 1989
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Handle: RePEc:wbk:wbrwps:316
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  1. Thorp, Rosemary, 1987. "Trends and cycles in the Peruvian economy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 355-374, October.
  2. Dornbusch, Rudiger, 1982. "Stabilization policies in developing countries: What have we learned?," World Development, Elsevier, vol. 10(9), pages 701-708, September.
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