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Latin America: progress through populist policies? A mixed picture



This publication is part of the Latin America after the commodity boom series

  • Latin American countries have managed to reduce poverty and income inequality over the past fifteen years. This is likely to have contributed to political stability.
  • However, a number of countries have pursued populist policies in the form of unsustainable macroeconomic and aggressive non-market policies when the commodity boom provided tailwind.
  • Non-market policies are not confined to the usual suspects like Venezuela, Argentina and Bolivia. Countries such as Ecuador and Nicaragua are on par with Argentina and a majority of Latin American countries face a risk of expropriation significantly higher than top performers Chile and Uruguay.
  • During the commodity price boom, presidents’ popularity ratings increased, only to start their descent in 2009. Without commodity prices propping up political stability, political risk is set to rise.
  • Looking ahead we see that only in Venezuela do unsustainable policies precipitate political change. Most other countries have had elections recently but there the risk of protests and riots has increased in the past five years.

Social development

As Latin America: the tide has turned shows, the commodity super cycle created a favourable macroeconomic climate for governments in the period 2003-2011. High commodity prices supported economic growth and government receipts. This created room for governments to expand their social policies (e.g. the Bolsa Familia in Brazil), which, together with the direct impact of higher economic growth on employment and personal income, has contributed to growth of the middle class and a reduction of poverty in most Latin American countries. Figure 1 shows how poverty declined in all countries except Colombia and Honduras between 2001 and 2013. In 2001, 24%[1] of the population in Latin American countries subsisted on less than $4 a day, while this figure was 21% in 2013. The countries that saw the sharpest decline were Argentina, Bolivia and Paraguay, although in Argentina the decline is likely to be overstated because of unreliably low official inflation statistics. In addition, the World Bank reports that the middle class in Latin America expanded to 30% of the region’s population back in 2009, up from 19% in 2003.

Figure 1: Poverty reduction in Latin America 2001-2013
Figure 1: Poverty reduction in Latin America 2001-2013Source: Sedlac, Rabobank

 Simultaneously, there has also been a decline in income inequality in all countries for which we have data (see figure 2). This decline goes against the international trend of rising inequality within countries (Stand & Rising, 2011). However, inequality is still rather high in Latin America, not only compared with the developed world but also compared with the BRICS (figure 3). The decline in poverty and income inequality is welcome, as income inequality can fuel social discontent and socio-political instability (Alesina and Perotti, 1993).

Figure 2: Development of the Gini coefficient in Latin America, 2001-2013
Figure 2: Development of the Gini coefficient in Latin America, 2001-2013Source: Sedlac, Rabobank
Figure 3: Gini coefficients in comparative perspective (2009 data)
Figure 3: Gini coefficients in comparative perspective (2009 data)Source: Macrobond, Sedlac, Rabobank

Re-emergence of populist policies

In the past fifteen years we have witnessed the rise of a number of populist regimes in Latin America. Notable examples are the Kirchners in Argentina, who came to power in 2003 and have been presidents ever since, and Hugo Chavez and Nicolás Maduro, who have led Venezuela since 1999. Populism is difficult to define, but both political science and development economics provide possible definitions. Albertazzi and McDonnell (2007) define populism as "[an ideology that] pits a virtuous and homogeneous people against a set of elites and dangerous ‘others’ who are together depicted as depriving (or attempting to deprive) the sovereign people of their rights, values, prosperity, identity, and voice". Drake (1982) emphasises that populism is characterised by a strong focus on redistribution of income, something that could actually be positive on a continent characterised by high levels of inequality. Dornbusch and Edwards (1991) further specify these definitions and argue that economic populism “[Is] an approach to economics 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”.

These policies are likely to result in macroeconomic imbalances. In this way, populism may pose a risk to sustainable economic development and political stability, despite some possible short-term gains. To establish if there has been a resurgence of populism, we must look at macroeconomic indicators suggested by Dornbusch and Edwards, the fiscal behaviour of governments and evidence of aggressive non-market policies.

Macroeconomic mismanagement

Dornbusch and Edwards (1991) describe a classic populist cycle: When populist leaders enter into power, they start implementing economic programmes aimed at redistributing income, generating employment and accelerating growth. In the short run this strategy works, while rising imports contain the impact of the demand expansion on inflation. When foreign exchange (FX) reserves run low, this economic strategy starts to collapse. As a result, inflation increases for products that are in short supply while the budget balance worsens, as the cost of subsidies on wage goods and FX increase sharply. Starting from this approach one would expect a populist regime to have a high budget deficit, a large current-account deficit and high inflation.

Table 1: Macroeconomic indicators
Table 1: Macroeconomic indicatorsSource: Macrobond, Rabobank

Table 1 shows the averages for Latin American countries for these variables. These data show that there is no clear-cut relationship between the three variables. A country like Venezuela, which boasts a large oil sector, has managed a current account surplus combined with rampant inflation and a large budget deficit. Argentina has high inflation but uses FX controls to control imports. Uruguay, not known for pursuing populist policies, does not perform very well on macroeconomic indicators. As many other factors – including capital stock, natural endowments and the terms of trade – influence these macroeconomic outcomes, we next look at the behaviour of governments to get an idea which countries have pursued the most populist policies.

Fiscal behaviour

As most definitions relate populism to strong redistributive policies, we look at fiscal behaviour. Figure 4 shows the fiscal expansion on a country level. We see that in most countries growth of (real) government spending has been consistently higher than GDP growth over the last fifteen years. It may not be surprising that the countries with the most high-profile populist leaders are also the countries that have seen the most dramatic relative increases in government spending. Venezuela saw the growth in government spending outstrip GDP growth by 4% annually, while figures were 3.2% and 2.9% for Argentina and Bolivia respectively.

Figure 4: Fiscal expansion in Latin America (2001-2015)
Figure 4: Fiscal expansion in Latin America (2001-2015)Source: Macrobond, Rabobank

Another way to look at fiscal behaviour is to check if there is a strong link between electoral and fiscal cycles. When governments rely on pre-election handouts to appeal to voters, they are arguably more populist. Using a model that follows from Woo (2006), we estimate if such a link exists[2]. We find evidence that government expenditure grew especially fast during election years. In years that an election takes place we see on average a strong fiscal expansion of around 1.4% of GDP between 2002 and 2014. We also find that there is no evidence of such a cycle prior to 2002, suggesting that the commodity price boom might have actually enabled populist leaders.

Non-market policies and business climate

Besides high budget deficits and a worsening external balance, Dornbusch and Edwards (1991) mentioned “aggressive non-market policies” as a feature of populist policies. The risk of expropriation of assets by national governments has been a problem in some Latin American countries. In fact, this risk is comparatively high (figure 7) in Venezuela, Argentina, Bolivia, Ecuador and Nicaragua. The most well-known example is the expropriation of oil producer YPF in Argentina in 2012, but other countries like Venezuela and Bolivia have also nationalised mining companies. Venezuela is a textbook example of non-market policy where even a supermarket was recently nationalised when the government claimed it did not stock enough products (as a result of price controls instated by the same government). 

Figure 5: Property rights protection
Figure 5: Property rights protectionSource: WEF, Rabobank

Most of these countries also score low on the Property Rights Protection and Undue Government Influence indices of the World Economic Forum (figure 5 and 6). Only Bolivia is an outlier here as it strongly improved its ranking on both these indices between 2007 and 2015, while the perceived risk of expropriation is still regarded as elevated. Many countries have seen the protection of property rights erode, while most countries improved their score on the Undue Government Influence index. On the face of it we see that the majority of Latin American countries lag significantly behind top performers Chile and Uruguay in terms of undue government influence and property rights protection.

Figure 6: Undue government influence
Figure 6: Undue government influenceSource: WEF, Rabobank
Figure 7: Risk of expropriation in Latin American countries
Figure 7: Risk of expropriation in Latin American countriesSource: IHS

What happens to political stability after the commodity boom?

If commodity price growth has enabled governments across Latin America to pursue more populist policies, this is likely to have contributed to political stability in the short run. The question is whether that stability is coming to an end now that external conditions have become more challenging. To gauge trends in political stability we use the presidential approval ratings from the Latinobarómetro. We are looking at a large number of countries, each of which has its own political dynamic. Figure 8 therefore presents a simplified picture, taking the average of the approval ratings and the Economist commodity-price index. This figure shows how popularity increased in the early years of the commodity boom and declined in recent years. Combined, they paint a clear picture: Commodity prices correlate with approval ratings and thus likely contribute to stability[3]. With commodity prices in the doldrums owing to the Chinese growth slowdown and the current oversupply in the oil market, this does not bode well for political stability in the short term. We see that political risk has increased in 40% of countries between the peak in commodity prices in 2010 and 2015 (IHS, 2015). Moreover, the risk of strikes has increased in three-quarters of the Latin American countries in our sample (IHS 2015).

Figure 8: Average approval ratings vs commodity prices, 2002-2014
Figure 8: Average approval ratings vs commodity prices, 2002-2014Source: Latinobarómetro, Macrobond, Rabobank
Figure 9: Political risk levels
Figure 9: Political risk levelsSource: IHS

Upcoming elections

Based on our analysis above, we foresee that political instability is likely to increase in the near future, barring an unexpected resurgence of commodity prices. The question is, of course, what this means for those in power. Will political instability precipitate regime change?

Figure 10: Increasing risk of protests and riots
ElectionGuide Figure 10: Increasing risk of protests and riotsSource: IHS

The year 2015 will see two interesting elections, with both Argentina and Venezuela heading to the ballot box. In Argentina, Kirchner’s nominated successor Daniel Scioli is currently leading the polls, despite Kirchner’s history of flagrant economic mismanagement. Venezuela on the other hand may see a regime change as the MUD, the main opposition party, is leading the polls with 61% of votes (giving it a 33%-point lead over incumbent PSUV). Other countries have no elections scheduled for the next two years, as many of them just had elections in 2014 and 2015. However without the chance to express their discontent at the ballot box, we see that 16 out of 19 countries have seen an increase in the risk of demonstrations and riots since 2010 (figure 10)[4]. These could still lead to early elections if the position of a current government becomes unsustainable.

Table 2: Upcoming elections
Table 2: Upcoming electionsSource: ElectionGuide

The overall increase in political instability and uncertainty over government change has proved to negatively affect investment and economic growth (Alesina and Perotti, 1993). Lower popularity also limits the scope for reforms, which are necessary to put countries on a higher growth path. The only upside is that populist regimes are in for a reality check. We can only hope that leaders who take their place stay clear of interventionist policies and instead introduce reforms to put their countries on a solid path towards economic growth without relinquishing the achievements in poverty reduction and inequality of the last decade and a half.


[1] For reasons of data availability, this average is based on the following sample of countries: Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Argentina, Mexico, Panama, Paraguay and Peru

[2] For an elaborate explanation of the model and regression results see Annex.

[3] We tried to test this hypothesis by creating a model explaining approval ratings by (real) GDP growth, inflation, real government spending growth and commodity prices. The model convincingly shows that last year’s GDP growth has contributed to popularity, a result in line with Alesina et al (1996). With limited and often skewed data it is difficult to obtain robust estimates for the effects of commodity prices.

[4] Brazil has a relatively favourable score despite mass protests in March. This is in part because Brazil does not have a history of protests. Despite the low score, the political impact of protests could be higher than in other Latin American countries where protests are more common, e.g. Peru.


Albertazzi, D., & McDonnell, D. (Eds.). (2007). Twenty-First Century Populism: The Spectre of Western European Democracy. Palgrave Macmillan.

Alesina, A., Londregan, J., & Rosenthal, H. (1993). A Model of the Political Economy of the United States. American Political Science Review87(01), 12-33.

Alesina, A., Özler, S., Roubini, N., & Swagel, P. (1996). Political Instability and Economic Growth. Journal of Economic Growth, 1(2), 189-211.

Alesina, A., & Perotti, R. (1996). Income Distribution, Political Instability, and Investment. European Economic Review40(6), 1203-1228.

Drake, P. 1982. Conclusion: Requiem for Populism? In Latin American Populism in Comparative Perspective, ed. M. L. Conniff. Albuquerque: University of New Mexico Press

Edwards, S. (1991). The Macroeconomics of Populism in Latin America. Chicago and London: NBER Conference Report, University of Chicago Press.

Ferreira, F. H., Messina, J., Rigolini, J., López-Calva, L. F., Lugo, M. A., Vakis, R., & Ló, L. F. (2012). Economic Mobility and the Rise of the Latin American Middle Class. World Bank Publications.

Stand, D. W., & Rising, W. I. K. (2011). An Overview of Growing Income Inequalities in OECD Countries: main findings.

Woo, J. (2006). The Political Economy of Fiscal Policy: Public Deficits, Volatility, and Growth (Vol. 570). Springer Science & Business Media.

Data sources

Binghamton University, Election Results Archive

Election Guide/

The World Bank, Socio-Economic Database for Latin America and the Caribbean


Doing Business

The World Bank, Worldwide Governance Indicators

World Economic Forum


I. Fiscal cycle model

To investigate the presence of a fiscal cycle in Latin America, we estimate a model that follows from Woo (2006). As we have an insufficient number of observations for country-by-country regressions, we use a panel to estimate our model, which covers the years 1989 to 2014 and includes the following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela. In this model the budget balance is explained by a number of factors, including GDP growth and inflation. To account for electoral cyclicality in fiscal spending, we use a dummy for a parliamentary election, a presidential election or either. To account for the positive effect of commodity prices on the budget balance, we include the Economist commodity-price index. This also caters to the fact that ‘wise governments’ do not let rising commodity prices feed into additional government expenditures right away, even though it becomes progressively more difficult not to do so if commodity price increases seem structural.

Following the outcome of the Hausman test, we use fixed effects. We start out with a broad specification (1). To save on degrees of freedom we prefer the combined election dummy over a separate presidential and parliamentary dummy (specification 3). To see whether the start of the commodity super cycle (dated generally around 2002) constitutes a structural brake, we split the sample in two around the year 2002 (specifications 4 and 5).

We see that in all specifications commodity prices are statistically insignificant, which supports our analysis in figure 4 that commodity prices have led primarily to an increase in spending across the board in Latin American countries. However, an election being held in a particular year reduces the budget balance by -0.7% of GDP. When we look at the estimates for the divided sample, we see that the election dummy is not significant before the election but is stronger and significant after the election, suggesting that high commodity prices helped governments to pre-election handouts. The estimation suggests that after 2002, if an election is held, the budget balance widens by 1.4% of GDP.

Table I: Regression results fiscal behaviour
Table I: Regression results fiscal behaviourSource: Election Results Archive, ElectionGuide, Macrobond, Rabobank

II. Approval ratings

We have estimated a model to establish whether governments have benefitted from commodity prices in terms of popularity. The specification is based on a model developed by Alesina, Londregan and Rosenthal (1990), who have pointed out that GDP is a good predictor for re-election, which means it could also be a reliable predictor for popularity. We use approval ratings taken from the Latinobarómetro.

The model factors in GDP growth. We include the real growth of spending as an indicator of possible (unpopular) austerity. High inflation imposes (unpopular) costs on small savers, so we include it in the model. To account for improved external conditions that do not directly work into GDP growth, we include commodity prices.

Table II: Regression results approval ratings
Table II: Regression results approval ratingsSource: Latinobarómetro, Election Results Archive, ElectionGuide, Macrobond, Rabobank

We see that last year’s GDP growth is very significant in explaining the approval rating of the president. Commodity prices are statistically significant only at the 10-percent level, which suggests a rather meagre link between commodity prices and approval ratings. However, if GDP is the main channel through which commodity prices support approval ratings, this doesn’t rule out that commodity prices significantly affect approval ratings. In the regression below, the statistical link is somewhat shaky as the already low significance is also sensitive to changes in the specification.

This publication is part of the Latin America after the commodity boom series


This study is a publication of Economic Research of Rabobank.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include Macrobond.

This data has been carefully incorporated into our analyses. Rabobank accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.

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Abbreviations for sources: WEO: World Economic Outlook, EIU: Economist Intelligence Unit, IMF: International Monetary Fund, WEF: World Economic Forum, DOTS: Direction of Trade Statistics

Abbreviations used for countries: AR: Argentina, BZ: Belize, BO: Bolivia, BR: Brazil, CL: Chile, CO: Colombia, CR: Costa Rica, EC: Ecuador, SV: El Salvador, GT: Guatemala, GY: Guyana, HN: Honduras, MX: Mexico, NI: Nicaragua, PA: Panama, PY: Paraguay, PE: Peru, SR: Suriname, UY: Uruguay, VE: Venezuela

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Jurriaan Kalf
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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