My speech today is about populism, about its appeal and its weaknesses. Populism wins supporters in part because it speaks to ordinary people about real problems - problems other leaders can be too embarrassed or nervous to confront. For instance, when Hugo Chávez attacked corruption and inequality in Venezuela, he wasn’t just making trouble. He was confronting some long-standing problems of Venezuelan society.
But populism also has a bad side: it pretends there are easy solutions, even when there are none - where the problems are in fact very difficult. Often the easy solutions have unintended effects, impacts that populists ignore or are unaware of.
It is these unintended effects that usually end up hurting the people those easy solutions were meant to help. Populist governments tend to be especially weak on economics, which is a common reason why their projects fail. I will explore what it is about economics that populism gets wrong, and what we can learn from that.
The knowledge I will detail is mostly drawn from Latin America, a place where populism has flourished over the past century. This experience is relevant for us because these economies closely resemble ours.
In particular, they are middle-income countries with high levels of inequality. Of course, every country is different. But the populist experience has been so similar across so many countries and time periods that we can pull together a few clear lessons relevant to our times and circumstances.
Economic populism starts with deep dissatisfaction. Too much unemployment, too much inequality, too much poverty. The populist solution is to start spending - push as much demand as possible into the economy, without consideration of constraints. The argument is that more spending will make people better off.
More demand encourages more supply, meaning more jobs and more investment. It’s supposed to be a virtuous circle. So the government starts spending money - as much as possible. It borrows from people’s pension funds. It borrows from the central bank and demands it buys its debt - which means printing money. It spends the foreign exchange reserves.
And at first sight, it works. As scholars of populism have noted, the immediate consequence of these policies tends to be an economic boom. There is more growth and big wage increases and more jobs.
But it doesn’t last. Time and again the boom turns to bust. Inflation shoots up and growth collapses. Some populists realise their strategy has failed and change course. Others put their countries through greater pain.
What is it about the populist recipe that goes wrong? The literature focuses on two kinds of constraints: inflation and the balance of payments. Now these are things populists probably don’t see coming. They don’t understand the causes of inflation very well. And they may not even know what the balance of payments is. But these are powerful forces, and ignoring them doesn’t mean they will leave you alone.
The inflation problem is fairly simple. If a government wants to stimulate demand, it will want low-interest rates, and it will demand that the central bank print money to buy its bonds.
This extra money does a couple of things: it raises demand, and with the economy running hot, firms and workers put up their prices. It causes the exchange rate to depreciate. And because people see the government is printing money, they start to put a lot of time and effort into figuring out where inflation is going and raising their prices to keep ahead of it.
This process then gets worse. In the first year, you get a fair amount of growth and a bit more inflation. In the second year, you get even more inflation and less growth. A few years on inflation is running at very high levels - there are cases of inflation exceeding several thousand percent as in Peru, Brazil and Zimbabwe.
This is poison to an economy - it destroys people’s savings and shuts down longer-term credit markets. It also interferes with the everyday business of buying and selling goods and services. So what starts with a nice growth bump ends in a deep depression and a large increase in poverty.
The other constraint is the balance of payments. When a populist government starts to push up spending, it increases domestic demand. That doesn’t change foreign demand so you don’t get more exports. In fact, local producers will probably be so worried about policy consistency and rising inflation that exports will stagnate. But the import bill still rises as demand booms, and that import bill needs to be paid somehow.
Populists may hope that new demand will all go into domestic production, but they are invariably proved wrong. There are no modern economies that produce everything they need locally, from oil to machinery to food to smartphones. Foreigners like to be paid in hard currency, not prone to inflation and depreciation.
There is also a third kind of constraint on populism, which moves a bit slower but may be the most dangerous of all. I’ll call it the “know-how” constraint, and it is fundamentally about the sources of wealth.
In the populist narrative, that story is simple. They say “our country is rich”. If the people are poor, that must be because someone else has hoarded these riches - like foreigners or elites. The solution, then, is to redistribute the wealth to the people.
In practice, however, although populists reliably point to sources of great wealth that they plan to redistribute - oil, land, gold, or something else - they invariably run into macroeconomic trouble.
The wealth doesn’t cover the extra spending they want to do. And they don’t appreciate that their anti-market rhetoric and policies disrupt production and kill off investment. As a result, they can deliver temporary consumption booms, but not lasting improvements in welfare.
Unfortunately, people fall for “get rich quick” schemes all the time, and countries can fall for them too. There is abundant evidence that the economic strategy of populism leaves people worse off than they were before. We should avoid reckless economic policies.
You cannot just be against populism - you need to be for something too. We need to talk about how we are going to get back to real and sustainable growth in South Africa.
Kganyago is the governor of the Reserve Bank. This was his address at the ABSIP Annual Financial Services Sector Conference in Johannesburg on Friday