Populism, Protectionism, and Political Instability

22 Pages Posted: 27 Jan 2021 Last revised: 30 Jan 2021

See all articles by Tyler Daun

Tyler Daun

U.S. International Trade Commission

Sebastian Galiani

University of Maryland - Department of Economics

Gustavo Torrens

Indiana university

Multiple version iconThere are 2 versions of this paper

Date Written: January 2021

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.

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Suggested Citation

Daun, Tyler and Galiani, Sebastian and Torrens, Gustavo, Populism, Protectionism, and Political Instability (January 2021). NBER Working Paper No. w28359, Available at SSRN: https://ssrn.com/abstract=3772598

Tyler Daun (Contact Author)

U.S. International Trade Commission ( email )

Sebastian Galiani

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Gustavo Torrens

Indiana university ( email )

Wylie Hall, 100 S Woodland Ave
Bloomington, IN 47405-7104
United States
8128568131 (Phone)
47405-7104 (Fax)

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