The economic consequences of populism: A supply side analysis of Poland and Hungary

Three decades ago, populism was considered as an economic phenomenon. In the context of post-World War II Latin America, Sachs (1989) and Dornbusch and Edwards (1990) famously argued that distorted and lax policies disregarding the intertemporal budget constraint of the state and attacking the highly uneven distribution of income culminated in economic and political chaos. In the most recent wave of populism, however, with a few exceptions, no such tendencies can be identified. In turn, supply-side economic analysis of populism has become rare, and economists have turned their attention to the demand side of the phenomenon. Yet, supply-side analysis does have its merits, as it points towards the long-term costs and consequences of certain economic and public policies under populist governments (Rovira Kaltwasser 2018). By applying the ideational approach to populism (Mudde 2017), this paper argues that incumbents’ attacks on checks and balances can cause serious deterioration in the quality of institutions in the economy, thereby endangering the long-term growth prospects of such countries. In the paper we have selected Poland and Hungary as two prime examples of populists in power in the EU, because these two countries showed remarkable growth performance without seemingly undermining the sustainability of macrofinances prior to the outburst of the COVID-19 pandemic. Yet, the spectacular growth record was paralleled with substantial decay in their institutional landscape, including the quality of regulation or the security of ownership (e.g., WEF 2019). By concentrating on such changes in these two economies, the paper demonstrates that the positive short-term results in the form of high growth rates do not necessarily translate into long-term benefits, due to the radical reshaping of the incentive structures in the economy. Based on the main findings of the two cases, the paper provides general lessons as well on the supply side of populism. Dornbusch, Rudiger and Sebastian Edwards (1990) Macroeconomic populism. Journal of Development Economics, 32: 247-277. Mudde, Cas (2017) Populism: An ideational approach. In: Rovira Kaltwasser, Cristóbal, Paul Taggart, Paulina Ochoa Espejo and Pierre Ostiguy (szerk.) The Oxford handbook of populism. Oxford University Press, 27- 47. Rovira Kaltwasser, Cristóbal (2018) Studying the (economic) consequences of populism. American Economic Review Papers and Proceedings, 108, 204-207. Sachs, Jeffrey (1989) Social conflict and populist policies in Latin America. NBER Working Paper Series 2897. WEF (2019) Global competitiveness report. World Economic Forum, Geneva.