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7/31/2017 The Real Roots of Populism by Andrs Velasco - Project Syndicate


Andre s Velasco, a former presidential candidate and inance minister of Chile, is
Professor of Professional Practice in International Development at Columbia University's
School of International and Public Affairs. He has taught at Harvard University and New
York University, and is the author of numerous studies on international economics and

JUL 28, 2016

The Real Roots of Populism

MONTEVIDEO Out-of-control globalization has destroyed jobs, caused middle-class
incomes to stagnate, and deepened income inequality. In response, angry voters are turning
to populist politicians. Without a radical shift away from liberal economic policies,
populism will be unstoppable.

This narrative is simple and increasingly popular. It is also dead wrong.

Precisely because populism whether leftist (Hugo Cha vez in Venezuela, Podemos in Spain)
or rightist (Donald Trump in the United States, the National Front in France) is ugly,
menacing, and destructive, its growing strength calls for nuanced explanation. A weak grasp
of causes will lead to ill-conceived solutions at which point populism truly may become

One problem with the emerging conventional wisdom is that it mixes three sets of factors
that should be kept separate for analytical and policy purposes. Product-market
deregulation and falling trade barriers belong to what academics call microeconomics.
Destabilizing international capital lows and self-defeating iscal austerity (Exhibit A: the
eurozone) are part of macroeconomics. Lower transport costs and new labor-saving
technologies fall under the rubric of exogenous structural change. Lumping all three
together as globalization only causes confusion. 1/4
7/31/2017 The Real Roots of Populism by Andrs Velasco - Project Syndicate

This confusion was evident two months ago, when the International Monetary Fund
published a piece that was greeted as the inal nail in the cof in of neoliberalism (an
empty label that can encompass whatever bugbear a critic wants to rail against on that
particular day). Yet the Fund was only saying what, at this point, is pretty obvious.
Unregulated international capital movements can be destabilizing. Large in lows appreciate
currencies, reduce competitiveness, and destroy jobs; sudden out lows cause those
appreciated currencies to crash, bankrupting local inancial institutions and requiring
costly bailouts at taxpayers expense.

Moreover, added the Fund, iscal austerity can back ire. Cutting useful expenditures or
raising distortionary taxes reduces the supply of goods. It also shrinks overall demand,
which is ine when the economy is overheated, but devastating when the economy is
depressed and a liquidity trap (Exhibit B: the eurozone again) prevents monetary policy
from doing the heavy lifting. If growth slows enough, the ratio of public debt to GDP can end
up rising, despite austerity.

So macroeconomic mistakes are costly in terms of growth, jobs, and income distribution.
Thats the bad news. The good news is that, by imposing intelligent capital controls (as
Chile did in the early 1990s and other countries have done since), an economy can enjoy
the bene its of free trade in goods and services with less destabilizing capital mobility. For
nearly a decade, the IMF has been acknowledging that controls are a useful policy tool a
change of heart that I lauded back in 2011.

Likewise, misguided iscal austerity is neither unavoidable nor inextricably linked to

globalization especially the smart kind that moderates short-term capital movements.
Closed economies also can have iscal crises, and open economies can avoid them if they
follow the right policies.

The key is to be Keynesian throughout the economic cycle: pursuing expansionary policies
when growth is slow; tightening to reduce public debt (and thus create room for future
expansion) when activity is buoyant. Fiscal rules can help make such behavior politically

So there is no need to throw out the baby of a liberal international economic order with the
bathwater of bad macroeconomic policy. Economies open to foreign goods and technology
can develop the tools to mitigate volatility and defend jobs. Europe, laboring under a
common currency, a half-hearted banking union, and an unnecessarily tight iscal policy,
has chosen to abandon those tools. That choice was neither preordained nor one that the
rest of the world should imitate. 2/4
7/31/2017 The Real Roots of Populism by Andrs Velasco - Project Syndicate

The other problem with the conventional wisdoms simplistic link between globalization
and populism is that it gets the timing wrong. Whatever the causes, average wages in the US
have been stagnant since the 1970s. As Daniel Gros has pointed out, the wage gap between
highly educated workers and the rest has been roughly constant in Europe (and declining in
the United Kingdom) over the last decade. And in countries like Belgium, France, and Spain,
the unemployment rate was at or above 10% for long periods in the 1980s and 1990s. But
there was no outbreak of nativist populism back then, and there is now. Why?

The answer has everything to do with politics. And politics, as former US House Speaker Tip
ONeill liked to say, is always local.

Elites in Western countries discredited themselves by permitting the inancial excesses that
helped trigger the Great Recession and by being slow particularly in Europe to deal with
the social consequences. Next they underestimated the effect that unfettered migration and
the perceived weakening of the nation-state would have on the sense of us the people
with whom we share a destiny and of whom we ask sacri ices (one of which is paying

Harvards Ricardo Hausmann has pointed out that the British choose to have four different
football teams (England, Scotland, Wales, and Northern Ireland), even though having one
united team might keep them from losing to tiny Iceland, as England did in the recent
European Cup. No wonder, then, that viewing the choice this way the UK opted for

Now Western political elites are making another mistake when seemingly cowed by the
populists they fail to mount a full-throated defense of liberalisms virtues. UK Labour
Party leader Jeremy Corbyns pathetic efforts on behalf of the Remain campaign ahead of
the Brexit referendum, and his inability (one might say unwillingness) to confront the
Brexiteers many untruths, is a case in point.

In the 1930s, thinkers like John Maynard Keynes and political leaders like Franklin
Roosevelt, with brave and eloquent words still worth quoting, discarded capitalisms
mindless orthodoxies in order to save the liberal democratic order. One world war and tens
of millions of deaths later, they succeeded.

Today, liberal democratic values are once again under siege, and the path paved by Keynes
and Roosevelt is still the only way out. We should follow it. 3/4
7/31/2017 The Real Roots of Populism by Andrs Velasco - Project Syndicate

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