‘Populist policies do ultimately fail; and when they fail it is always at a frightening cost to the very groups who were supposed to be favoured.” Though we wish we had made such an eloquent observation, credit must go to economists Rudiger Dornbusch (now deceased) and Sebastian Edwards (now at UCLA). Their words must sound awfully familiar to anyone in Thailand.
In 1990, the two economists set out to document in detail the evolution of the infamous populist regimes in Latin American countries such as Argentina, Brazil and Chile. Although the politics differed from one country to another, the populist policies all failed miserably in an economic sense. And yes, that was more than two decades ago. So history does repeat itself again and again, especially the painful parts.
The populist paradigm: Dornbusch and Edwards defined the term macroeconomic populism as economic management that emphasises growth and income redistribution but de-emphasises, among other things, deficit financing and the reaction of economic agents to aggressive non-market policies.
These programmes usually start from dissatisfaction with a country’s growth performance and/or economic inequality. These pre-conditions are conducive for rejecting the conservative paradigm and its constraints, be it operational feasibility or financial affordability. Again, this sounds awfully familiar, doesn’t it?
What came next followed a similar pattern in each country. With initial popular support, most populist governments were very successful in the first year or so, before running into bottlenecks as the economy expanded more rapidly than the capacity could bear. Inflation accelerated and the budget deficit worsened because of pervasive subsidies. Foreign investors took these signs as bad news, leading to capital flight and depressed investment.
Thailand might not be following exactly the same path as Latin America, but history teaches us once we realise populist policies have failed, it’s probably too late. And arguably, on the path described by Dornbusch and Edwards, we have already checked more boxes on the checklist than we should have.
The populist bias: More recent research by Daron Acemoglu of MIT and his colleagues explains why politicians adopt populist policies and receive electoral support, knowing the risks they are taking. The driving force of populist politics is the weakness of democratic institutions, which makes voters believe that politicians might have a right-wing agenda (“conservative” or “free market”) or may be corrupted by rich lobbies.
What’s interesting is that even those politicians who may in fact be influenced by the rich lobbies will choose to mimic the “honest” candidates, thereby exhibiting ‘’leftist” tendencies as well. This means that fixing economic populism will require more than imposing fiscal and legal constraints on spending and policy promises. It requires an overhaul of the democratic institutions to rebuild credibility and transparency to command public respect once again.
Once voters can sort out who is who, not from political rhetoric, but from real information, then they can ultimately make better choices in the polling booth.
The US is also toying with the idea of an almost 40% increase in the minimum wage, something Thailand has already done.
Here at home, the latest survey of economists by Bangkok University shows that the majority saw “extreme populism campaigns” in the Feb 2 election campaign, and thought something should be done about their pervasiveness. They believe it is crucial that voters should be aware of such tendencies, and also the facts underlying populist “promises”, which may be proved false scientifically.
The survey reported 76.7% of respondents suggested a committee be set up to study the feasibility of policies that political parties announce. As well, 93.3% said those policies must be successfully (and sustainably, we add) implementable, while an equal proportion said policies must not encourage irresponsible behaviour by the people. Finally, 91.7% said such programmes must not intervene with the functioning of price mechanisms. All respondents had at least one populist programme in mind: the rice pledging scheme.
Left and rice: By buying rice from farmers at a premium price, (more than 50% above market prices), the programme would have been a success had world rice prices rose too. But rice prices haven’t really gone up for some time.
The UN Food and Agriculture Organization forecast last November import demand for rice was likely to weigh on the market again in 2014. As well, world rice production is forecast to exceed utilisation – despite limited growth in 2012-13 – resulting in yet another increase in inventories.
In short, the rice-pledging scheme has come back to haunt farmers, confirming what Dornbusch and Edwards pointed out two decades ago. Its failure stemmed purely from not respecting market behaviour and microeconomic incentives. Economists agree on only one thing: that incentives matter. And that was what the architects of the Thai programme failed to take into account. Adam Smith’s invisible hand may not always be fair, but it is always working.
A usual leftist argument for the scheme is that it redistributes wealth to the underprivileged. The evidence is at best mixed. For instance, we looked at the average monthly wage, a proxy for economic wellbeing, of workers in agricultural and non-agricultural sectors. Taking inflation into account, the average wage of employees outside agriculture rose by 23% from 2011-13, thanks to the minimum wage drive, while agricultural workers saw only a 15% rise. Had the programme really benefited farmers, shouldn’t we see a narrower gap?
Support agriculture, we must: History proves that economic populism does not last, and at worst it will fail. Still, we should support the agricultural sector. Though it contributes only 10% of GDP, almost 40% of the Thai workforce still makes a livelihood in the sector. Spend the same amount of money to drive for better quality crops with higher productivity per rai, not on populist subsidies.
TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Benjarong Suwankiri and Warapong Wongwachara. They can be reached at tmbanalytics@tmbbank.com