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Wednesday, May 22, 2024

Sensible Policymakers Must Step Up Their Game to Defeat Populists

The year 2024 is going to be a big one for elections. Not only will the United States be holding significant elections, but many other countries, including Algeria, India, Mexico, Pakistan, Russia, South Africa, and Taiwan, will also be heading to the polls. With around 3 billion people in countries producing about a third of global GDP having the chance to vote, the outcome of these elections will undoubtedly have an impact on the global economy.

For a long time, economists have been concerned about the rise of populist politicians. They have historically been associated with economic incompetence, with leaders like Silvio Berlusconi in Italy and Salvador Allende in Chile. On the other hand, more “sensible” leaders such as Konrad Adenauer in Germany and Bill Clinton in America, have been linked with strong economic growth. New research, soon to be published in the American Economic Review, provides quantifiable evidence to support these assertions.

The research, conducted by Manuel Funke and Christoph Trebesch of the Kiel Institute for the World Economy, and Moritz Schularick of the University of Bonn, spans over a century of data. By classifying administrations as “populist” or “non-populist” based on whether their ideology has an “us-versus-them” flavor, the researchers have been able to show how various economic outcomes, including GDP growth and inflation, differ between the two types of regime. The findings reveal that 15 years after a populist government has entered office, GDP per person is 10% lower than in the “sensible” counterfactual, and public debt ratios are higher. This demonstrates that populism has detrimental effects on the economy.

While the results may be comforting for those who believe in the importance of competent and ethical politicians, it raises a question about the relative efficiency of sensible politicians. Recent examples, such as the economic performance under Donald Trump in the US, Recep Tayyip Erdogan in Turkey, and Narendra Modi in India, suggest that the gap between sensibles and populists may not be as pronounced as it once was. This has led to concerns that countries with sensible leadership are finding growth harder to attain and that their performance may not be as strong as it once was.

In light of this, it’s important for moderate, technocratic governments to regain their growth advantage. It’s clear that the faith in the economic competence of sensible governments is diminishing, and if this trend continues, voters may feel less apprehensive about voting for more radical politicians. Ultimately, while economists are historically justified in critiquing the economic policies of populist leaders, sensibles need to step up their game and get their house in order.

For further expert analysis on economics, finance, and the markets, take a look at our more from Free exchange, our column on economics. There’s always more to explore and learn, so we’re here to help you stay informed.

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