The Economic Consequences of Populism

Over the last few decades, populists have come to power in a long list of countries. Italy elected Silvio Berlusconi, and Turkey empowered Recep Tayyip Erdogan. Venezuela had Hugo Chávez and now Nicolás Maduro; its neighbor, Brazil, was governed by Jair Bolsonaro until 2023. Argentina’s current president, the anarcho-capitalist Javier Milei, is clearly a populist. And the United States voted Donald Trump into power in 2016. It may do so again.

Dazzling, entertaining, sometimes downright grotesque, populist leaders span the political spectrum. Chavez and Maduro are socialists, whereas Milei and Trump are conservatives. Sometimes, the leaders defy simple left-right categorization. What they all have in common is a desire to consolidate power by using the same, angry message. Populists sell themselves as outsiders fighting for the masses, representing "the real people" against a corrupt elite.

Populism is surging. The drivers of populist voting are reasonably well understood, but its economic implications have been understudied. As a result, it was an open question whether populists have a discernible effect on the economy or not.

To fill this gap, we carried out a comprehensive study of populist leadership across the world. We built a dataset covering 120 years of history and 60 countries and identified 51 populist leaders whom we define as those who place a conflict between the “people” and the “elites” at the center of their electoral campaigns or governance. We then studied the economic policies they pursued and the consequences that followed.

The findings were grim. Although, on the surface, populist leadership may seem to have mixed economic effects, we found that most populists weaken a state’s economy, especially in the long run. They do so in large part by undermining the rule of law and by eroding political checks and balances. Our study makes clear that although populists may sell themselves as the solution to a country’s ills, they tend to make life worse. Populists, in other words, hurt the “real people” they claim to be saving.

An age of populism

Throughout modern history, populism has experienced two main waves. The first came in the 1930s, during the Great Depression and its turbulent aftermath. During the Cold War, populism receded, but after the fall of the Berlin Wall in 1989, populism returned with a vengeance. Today, the world is again in an age of populism. A record high came in 2018, with 16 of the 60 countries we surveyed, representing more than 30 percent of global GDP, governed by populists. Today, populists still govern more than a dozen states.

_{Figure 1 Populists in power: Share of countries in sample}

Although populists transcend the ideological spectrum, there are significant differences between left-wing and right-wing populists. Right-wing populists emphasize ethnic and cultural divisions, accusing elites of colluding with minorities and immigrants and prioritizing their interests over those of the “true people.” On the left, populists attack economic and financial elites for plundering the country at the expense of the local working population. Left-wing populism is mainly a story of the mid-twentieth century, experiencing a brief revival in the first decade of the 21st century. But right-wing populism has skyrocketed in recent times.

In both cases, populism is a serial phenomenon. Countries that have already been governed by populists have a higher probability of another coming to power. Argentina—home of the first modern populist leader, Hipólito Yrigoyen—has been governed by populists for almost 40 percent of its history since 1900. Italy has had populist leadership for 29 percent of that period. Slovakia has been governed by populists almost 60 percent of the time since winning independence in 1993.

Part of the reason for this persistence is that populists are political survivors. They rarely disappear quickly or on their own. Instead, they do everything they can to increase their chances of retaining power, be it through their core strategy of polarization and agitation or through more drastic methods such as new electoral laws, takeovers of the media, and intimidation of the judiciary and opposition.

As a result, populists are in power for an average of six years, compared with three years for non-populist rulers. They are much more likely to be re-elected, with a probability of 36 percent, compared with only 16 percent for non-populists, a gap explainable by their popularity as well as their adeptness at insulating themselves from the levers of democracy.

Take the former Italian prime minister Silvio Berlusconi, a billionaire media tycoon who rose to power by posing as an anti-establishment politician in the wake of Italy’s heavy corruption scandals of the early 1990s. Often referred to as a "clown" by opponents and the international media for his lack of seriousness, Berlusconi nevertheless retained power longer than any other prime minister in Italy’s postwar history. He left office in 2011, having governed the country on and off for close to two decades, but Italian politics remains fundamentally shaped by his populist image. Also, most of his successors have been populists, including the current prime minister, Giorgia Meloni, whose anti-immigrant, anti-EU electoral campaign drew heavily from the populist playbook.

Populist stagnation

Despite populism’s durability, there has been little systematic research on how economies develop and perform when populists come to power. But it is easy to find anecdotal examples of populists’ causing economic damage. Brexit, for which the populist politician Boris Johnson was the lead champion, brought economic decline. The “Global Britain’’ envisioned by Brexit’s supporters has lagged behind its peers ever since, its economy growing five percent less than comparable countries over the last eight years. Decoupling Britain’s economy from the European single market has led to declines in trade, investment, and consumption.

Berlusconi’s policies in Italy deserve similarly poor marks. Since his arrival on Italy’s political scene, the economy has stagnated, with sluggish GDP growth and productivity; since 2000, the average annual economic growth rate has only been half a percentage point. The education system remains in crisis, and the country’s brightest minds have emigrated.

More drastic examples can be found in South America. Chávez and Maduro together turned Venezuela, once a wealthy oil exporter, into a poorhouse within 20 years. Protectionism, nepotism, and nationalizations of the oil, mining, finance, telecommunications, and agriculture industries, among other sectors, created an economic disaster without precedent in a modern peacetime state—resulting in famine, medical crises, and mass migration out of the country. In Argentina, President Néstor Kirchner and his successor and wife, Cristina Fernández de Kirchner, also led their country off the financial cliff. A few years of export-driven growth were followed by rampant inflation and national bankruptcy.

But the economic performance of populist leaders is not so easily generalized. The United States under Trump saw economic growth rates comparable to those of previous presidencies. Other populists, such as Indian Prime Minister Narendra Modi, Erdogan in Turkey, and Hungarian Prime Minister Viktor Orban have also had some degree of economic success during their time in office.

Our research dug beneath the anecdotes and found a common thread. To do so, we used an algorithm that compared the trends in a country’s economy before and after the rise of a populist to those in similar countries not ruled by populists. Overall, we found that populists in power cause considerable economic damage, especially in the medium and long run. After 15 years, GDP is on average 10 percent lower in populist-run countries than in non-populist ones.

There are two main explanations why populists are bad for economic growth. One is protectionism. Populists traffic in nationalist rhetoric and, predictably, practice economic nationalism once in office. On the left and right alike, populists impose tariffs and pursue fewer trade agreements, thereby slowing the flow of goods and services. They also erect barriers to foreign investment, undermining economic growth.

The second reason is even more fundamental. In their efforts to stay in power, populist leaders undermine the rule of law. They are unafraid to trample on norms and legal codes and to weaken democratic institutions, firing judges or launching investigations into businesses that stand in their way. Standard indicators for judicial, electoral and media freedom fall significantly after populists come to power. This weakening of institutions is in turn bad for economic growth, investment, and prosperity, as years of research have shown. That is because functioning democratic institutions constrain the executive and protect civil society (including companies) from arbitrary interference, which is important for investment, innovation, and growth.

The economic history of populism since 1900 thus makes clear that populist governments tend to be damaging. Populist leaders may promise to protect and support ordinary people but often do the opposite. Their countries experience declines in both economic growth and political freedoms. Populists may manage to hold on to power anyway by polarizing the electorate and by manipulating the political system in their favor. But they cannot claim to have solutions to economic problems.

Published on September 26, 2024 in Foreign Affairs.