Correcting populist policies is essential for India's growth

Economic populism is a political approach that frames economic issues as a conflict between the common people and a corrupt or out-of-touch elite, quite often with a strong dose of nationalism railing against globalisation. Populism is back in fashion, this time in the United States, Hungary, and in several countries in the Global South. Populist parties have also made huge gains in Europe, including in its heartland, France and Germany.  

In the United Kingdom — which left the European Union — a period of populist and incompetent governments under Boris Johnson and the hapless Liz Truss turned the electorate away from the Conservative Party. Rishi Sunak tried to restore confidence in the Conservatives but lost badly to the Labour Party. In Poland, a 10-year period of populist government ended with the election of a more liberal Donald Tusk. But Donald Trump, despite a chaotic first term from 2016-2020 and a mismanaged pandemic that led to his election loss in 2020, is back in power in the US, while Viktor Orbán, another right-wing populist, remains strong in Hungary.  

The world has seen waves of populism before. In a study published in the American Economic Review in 2023, Funke et al¹ examined periods of populist government across the world from 1900 to 2020. The share of populist governments rose in the 1930s — with the rise of Hitler and Mussolini in Europe — and again in the 1950s, mostly in Latin America. Populism rises and eventually wanes. Populism of the 1930s eventually led to World War II. A second wave of populism has now swept the world since the collapse of the Soviet Union. The study shows that the share of independent countries with populist governments rose from under 5 per cent in 1991 to over 25 per cent by 2019, and is now closer to 30 per cent. 

In their 120-year study, Funke et al also show that the costs of populism are high — with gross domestic product (GDP) per capita 10 per cent lower, public debt 10 per cent higher, and institutional quality weakened. They further find that left-wing populism is as damaging as right-wing populism. Their study includes many left-wing populists, such as Juan and Eva Perón in Argentina, Indira Gandhi in India, Hugo Chávez and Nicolás Maduro in Venezuela, and Andrés Manuel López Obrador in Mexico. On the right-wing side, Jair Bolsonaro of Brazil, Recep Tayyip Erdoğan in Türkiye, and Narendra Modi in India are classified as populists. While some may nitpick about the study’s classifications, the broader results would not change significantly even if a few names were excluded. 

Populists, whether from the left or the right, have a greater penchant for autarchic policies that restrict trade and view the world through a mercantilist zero-sum perspective. Mr Trump’s massive tariffs are the most recent example. Some also try to interfere with the interest rate policies of the central bank, weakening their credibility as Mr Erdogan did in Turkiye. Right-wing populism is also associated with immigration restrictions, driven by the mistaken belief that immigrants take jobs from locals, free-ride on services, and increase crime, whereas in reality they mostly contribute to economic prosperity, pay taxes, and are less prone to criminal activity. 

They also favour industrial policy, where subsidies are directed at chosen firms combined with import protection. What is needed are pro-market policies supported by strong institutions that uphold the rule of law; what they deliver are pro-business policies accompanied by weakened institutions and cronyism. They are also fiscally irresponsible, with right-wing populists favouring tax handouts for the rich and left-wing populists favouring large welfare measures for the poor that are not properly targeted, leading to waste, corruption, and rising government debt. A detailed study of 8,000 municipalities in Italy over 20 years showed populist governments, even at the local level,  saw higher cost overruns on projects, lower capacity to collect revenue, reduced debt repayment, higher bureaucratic turnover, and lower quality of bureaucracy as political appointees replaced experienced staff.  

Recent experience shows that right-wing populists in the Global South have a penchant for prestige showcase infrastructure projects, much like those who came earlier like Mussolini. Mr Bolsonaro in Brazil was building roads into the Amazon forest. Mr Erdogan in Türkiye built new airports, bridges, and tunnels in Istanbul and approved shoddy construction, which crashed during the recent earthquake. While all this infrastructure spending boosts economic activity, they alone are not enough to generate jobs for millions and add to the country’s debt. And in most cases, populists find it difficult to manage a crisis — such as a pandemic — because their instinct is not to consult, or follow scientific evidence and expertise, but to pass draconian decrees.  

Some will question the right-wing economic populist label in the Funke et al study for the Modi government. Its infrastructure programmes have largely avoided wasteful prestige projects and have been very positive for the economy. India’s information technology (IT) stack has also provided huge benefits in better service delivery and access to finance. It has instituted an inflation targeting regime and not interfered in the Reserve Bank of India’s monetary policy committee decisions, and it has instituted reforms such as the goods and services tax and the Insolvency and Bankruptcy Code, to name a few. But increasing import protection since 2018 and its pro-big business policies do come from a right-wing populist playbook, while its free food for 600 million people is more left rather than right-wing populism. Labels aside, India must focus on correcting these aspects of populism for a more competitive and inclusive economy.  

How and when this wave of populism around the world will end is not clear. What we learn is that the path forward for the world may be uncertain, with geopolitical fractures, trade wars, advent of artificial intelligence, and climate change, but the lessons of the past — offer a clear warning against the siren song of populism both on the left and the right.  

 

The author is distinguished visiting scholar, Institute for International Economic Policy, George Washington University. His book Unshackling India (HarperCollins India) was declared the best new book in economics in 2022 by the Financial Times, UK.  

1. Manuel Funke, Moritz Schularik and Christoph Trebesch “Populist Leaders and the Economy,” American Economic Review 2023, 113 (12):3249-328.