Populism, Protectionism, and Political Instability

Tyler Daun, Sebastian Galiani and Gustavo Torrens

No 28359, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Most populist regimes in Latin American countries used trade policy to redistribute income, despite being less efficient than other redistribution schemes such as transfers financed with an income tax. Often, this outcome is attributed to the lack of fiscal capacity in Latin American countries. Instead, we develop a simple political economy game where the populist government may use trade policy to encourage capitalists to invest in the more labor-intensive industry. Since moving capital is costly, those capitalists will support the continuation of the protectionist trade policy even after the populist government falls from power. The populist government may therefore choose to implement the less efficient but politically-sustainable policy instead of the more efficient policy that will be easily overturned after a regime change. Building fiscal capacity does not change the equilibrium. Only a long run commitment to a minimum level of redistribution restores efficiency.

JEL-codes: F13 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-int, nep-lam and nep-pol
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