Bad politics hurts global growth

As unemployment falls and middle-class incomes begin growing, the populist temptation will wither, or so they hope.

By Andrés Velasco

Published: Fri 26 Jan 2018, 8:00 PM

Last updated: Fri 26 Jan 2018, 10:25 PM

Markets, like the pundits meeting in Davos this week, are hopeful: the world economy is well on its way toward a balanced and perhaps sustained recovery. With the economy on the mend, will politics follow suit?
For people who view the surge in populism around the world as an aftershock of the global financial crisis, the answer is yes. As unemployment falls and middle-class incomes begin growing, the populist temptation will wither, or so they hope.
If only it were that simple.
Populist politicians who happen to be in office (think Donald Trump or pro-Brexit Tories) will claim credit for the recovery, and that will strengthen their political hand. But that is only a short-term phenomenon. During the last few years, a lively debate has taken place between advocates of economic and political/social explanations of populism. The economic explanation emphasizes that in a world of widening economic inequality and stagnating middle-class incomes (here the United States is cited as Exhibit A), no one should be surprised if angry middle- and working-class voters turn to politicians who promise to reverse these trends.
The issue is far from settled, but even if the economic explanation is right, it does not follow that the current global recovery will make much of a political difference. If recent asset-price inflation is any indication of things to come (and note that real interest rates are likely to remain low for a very long time), growth could be of the kind that again disproportionately increases the income and wealth.
Even in the best-case scenario, in which income distribution did begin to improve, one thing economists of all stripes agree on is that change would be glacially slow. Other factors that have plausibly stoked political upheaval - deindustrialization, loss of manufacturing jobs, stubborn pockets of unemployment in left-behind cities and regions - would also change very slowly, if at all. Even if the rising tide of recovery does lift all boats, as conservative economists like to say, it will not be enough to push many vessels clear of populist tempests. That is also because many of the factors behind populism are non-economic. The first piece of evidence is that populist parties have gained mass support (if not power) in countries with relatively strong economic performance. This is true of developed countries like Germany and Sweden, and of emerging economies like the Philippines and Turkey.
As is frequently pointed out, populism is a style of politics that creates an "other" on which society's ills can be blamed. In the left-wing variety, the "other" is the elite - whether economic, financial, or political. For right-wing populists, foreigners, immigrants, or ethnic and religious minorities serve the same purpose. The phenomenon is far from new. Populism was widespread in the US in the late nineteenth century; twentieth-century European fascism was a variety of right-wing populism; and left-wing populism has of course been a feature of Latin American politics. Two factors have arguably facilitated the recent return of populism: accelerated cultural and social change, and the perceived corruption of established political elites. Start with cultural and social change. Giants of sociology, like Émile Durkheim, Ferdinand Tönnies, and Georg Simmel,worried long ago that the transition from traditional to modern society undermined traditional support structures and left individuals feeling isolated and unhappy. Alienation was a result of modernization, not a symptom of its absence.
The lesson of earlier periods is that populism thrives in environments where longstanding sources of identity - for example, class or nation - have weakened. In rich countries, this weakening has happened as a result of cultural globalization and mass migration; in emerging countries, traditional roles and values are succumbing to rapid urbanization and the rise of a new middle class employed in industry or services.
This brings us to the other key factor underpinning support for populism: the declining legitimacy of political elites. It is impossible to understand Trump's rise without recourse to the popular perception (correct or not) that many American politicians are in the pocket of greedy bankers. Arguably, the Five Star movement would not have gained so much strength in Italy if voters there didn't think the traditional political class had systematically enriched itself with public money.
Latin American populism, of course, is incomprehensible without the corruption of many in the political elite. None of this will change with the global economic recovery. What we need is political leadership - to help people make sense of the changes they are experiencing - and reforms that build credible Chinese walls between money and politics, and use technologies to increase democratic accountability and facilitate citizen participation. Central bankers - the gray-suited engineers of the current economic upturn - have done their job. Politicians now have to do theirs. 
- Andrés Velasco is a former presidential candidate and finance minister of Chile.
-Project Syndicate

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