民粹主义：现象

7. Other Historical Cases of Populism Below, we scan cases of prominent populists (some democratically elected, some not) from times other than the 1930s, going roughly chronologically. As you’ll see, similar patterns are evident in many of these cases.

US 1830s: Andrew Jackson Andrew Jackson was president from 1829 to 1837—the first US president who was neither a wealthy Virginian plantation owner nor a member of the wealthy Adams family from Boston. Like other populists, he came to power by running against the political and economic elites and supporting the common man. He defeated John Quincy Adams’ reelection campaign—Adams had presided over an ineffective and unpopular administration after his controversial election in 1824. Once elected, Jackson ruled as a strong chief executive, while appointing inexperienced people to government posts, favoring agrarian interests over economic elites (such as through his opposition to a national bank), and supporting US expansionism into territory held by Native Americans. Economic/Political Background Jackson’s populism came at the right time, demographically and economically. Demographically, the US electorate had just expanded to include a far broader portion of the US male population, as property qualifications for voting were significantly decreased in the 1810s and 1820s. And the admission of nine new states to the Union shifted power away from the urban centers and toward the “western” frontier. Many of these frontier voters also broadly felt like the economic system wasn’t working in their favor. The Panic of 1819 was made significantly deeper by the Second Bank of the United States (the de facto central bank) tightening monetary policy, worsening conditions. The mismanagement of the crisis, combined with a fraud scandal concerning some of the bank directors, made the bank broadly unpopular. The deflation that resulted was especially painful for agricultural states, prompting distrust of the bank and the political elite. Jackson, as a self-made man who rose to prominence as a war hero, would embrace this distrust during his presidency. Jackson also benefited from increasing regional tensions: while the Democratic-Republicans were the only major political party by the late 1810s, this unity masked divisions among the states over major issues, including slavery, economic policy, and westward expansion. These divisions came to a head with the Missouri Crisis (1820), over whether Missouri should be admitted to the US as a slave state or free state. A compromise was reached (admitting Missouri as a slave state along with Maine as a free state, to maintain the balance of slave and free states in the Senate), but it left a bad impression on both sides, leaving an opening for an outsider like Jackson. Rise to Power Jackson first ran for president in 1824, one of four candidates to contest the election. He won a plurality, though not a majority, of both the popular vote and Electoral College, with his support concentrated outside the Northeast. Since no candidate received a majority of the Electoral College, the election was decided by the House of Representatives. The House elected John Quincy Adams as president after the fourth-place finisher, Henry Clay, directed his supporters to vote for Adams. Clay was subsequently appointed secretary of state by Adams. Jackson and his supporters were embittered and described the result as a “corrupt bargain.” Jackson prepared for a second presidential run, founding the Democratic Party with Martin Van Buren. His campaign argued that the last election had been stolen from Jackson, and it benefited from the unpopularity of Adams’ policies, especially outside the Northeast. Adams had supported a major expansion of tariffs in 1828, referred to among his opponents as the “Tariff of Abominations.” In this period, tariffs were mainly supported by Northern industry, while rural communities in the South opposed them since they made imports more expensive and, in some cases, hurt agricultural exports. Jackson won the election by a significant margin, winning all Southern and Midwestern states. He then remained president for two terms, before being succeeded by his second vice president, Martin Van Buren.

Newspaper circulation was growing rapidly in the early 1800s and Jackson used newspapers to spread his message. During his 1828 campaign, Jackson’s supporters created an extensive network of newspapers across the country that tailored his populist message to the voters of their region. Once in office, he included several prominent newspaper editors in his “kitchen cabinet” of advisors. Key Policies Jackson’s governing philosophy mainly focused on supporting agrarian interests and promoting the people at the expense of the political/financial elite. Two of his most prominent policies in favor of agrarian interests were his support of forcibly relocating Native American populations (ignoring the Supreme Court’s order against it) and his vociferous opposition to the new national bank, the Second Bank of the United States. He also defended the powers of the federal government against efforts of Southern states to claim greater autonomy, leading to one of the biggest conflicts of his presidency, the Nullification Crisis. Jackson’s populist tendencies were on display from his inauguration, when he invited the public to attend the White House ball afterwards, prompting a wild party. For this and other activities, he was nicknamed “King Mob.” Similarly, he expanded the usage of the president’s power to replace civil service workers through political appointments, to minimize the autonomy of government bureaucracy. He then appointed inexperienced people to government roles, which produced a dysfunctional cabinet for much of his first administration. Nullification Crisis and Tariffs While Jackson’s policies were predominantly in favor of Southern, agrarian interests, he also opposed the arguments of Southern states that they could nullify federal laws or secede from the union. Southern states opposed Adams’ “Tariff of Abominations,” and South Carolina attempted to nullify the law in the state. Jackson opposed the tariff, but firmly supported the power of the federal government to create it. He publicly feuded with Vice President John C. Calhoun over the issue and threatened to send troops to South Carolina to enforce the law. A compromise was reached when Congress lowered tariff rates in 1833, and South Carolina agreed to respect the old law; the larger dispute over states’ rights versus the federal government, however, would continue until culminating in the Civil War. Economic Policies and Opposition to the Second Bank Jackson also viscerally distrusted economic elites, especially banks, and wanted the government to have a smaller economic footprint (for example, he paid off the US national debt). This distrust led him to oppose the new Second Bank of the United States. Agrarian interests blamed the bank for the Panic of 1819, and Jackson believed that it had corrupt ties with the political elite and abroad. He first vetoed a bill that would have renewed the bank’s charter from Congress. The controversy over the bank became a major issue in the 1832 election, and Jackson successfully made the populist case against the bank. After winning the election of 1832 by an even bigger margin than the previous election, Jackson transferred all federal deposits from the Second Bank to smaller state banks. This move both weakened the Second Bank, which eventually liquidated in 1841, and created a vast boom in credit, as it dramatically increased the ability of smaller banks to create deposits. Jackson’s opposition crippled the ability of the US to form a centralized monetary policy until the creation of the Federal Reserve in 1913. More immediately, Jackson’s economic policies worsened the impact of the Panic of 1837. His support of local banks, combined with a slight devaluation against gold, had spurred a real estate bubble, especially concentrated in the sale of former government-owned land in Western territories. To limit the speculation, the government ordered that all purchases of government land be paid in hard currency. This tightening, combined with rising interest rates in Europe, led to a sharp contraction in credit and an economic recession after the Panic of 1837.

USA Equity Prices (Indexed to 1820) Equity prices rally, driven by credit expansion as Jackson favors local banks over the Second Bank

1836: Bank of England begins raising rates, leading to a global tightening

160 140 120 100

Note: Index primarily composed of banks, insurance companies, and railroad companies, so limited representation of overall economy

Depression from late 1830s to 1843

80 60

1820

1825

1830

1835

1840

USA Gold Price (USD)

1845

USA CMD Prices (Indexed to 1820) 120

23.0 Panic of 1837: NYC banks suspend gold convertibility to commercial paper.

CMD prices rally, driven by credit expansion as Jackson favors local banks over the Second Bank

22.5 22.0 21.5

Depression from late 1830s to 1843

100 90

21.0

1834 Coinage Act: Ratio of gold to silver in coinage changed, implicitly devaluing currency

20.5

80

20.0 70

19.5 19.0 1820

1825

1830

110

1835

1840

60 1820

1845

1825

1830

1835

1840

1845

USA Long Rates 6.5% 6.0% Rising rates during Panic of 1837

5.5% 5.0% 4.5%

Discontinuity after federal government pays down national debt

4.0% 3.5% 3.0% 2.5%

1820

1825

1830

1835

1840

1845

Populism-Related Quote from Jackson •

“It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purpose…When the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society—the farmers, mechanics, and laborers—who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government.”

US 1890s: William Jennings Bryan William Jennings Bryan, known as “The Great Commoner,” rose to prominence in 1896 when broad populist support lifted him to the Democratic Party’s presidential nomination. Against the backdrop of debtors (especially farmers) being hurt by deflation/tight money, his fiery campaign rhetoric targeted financial elites and championed a return to bimetallism as a way to ease debt burdens. Economic/Political Background Bryan’s populist rise is deeply rooted in the US government’s monetary policies of the late 1800s and the resulting deflationary economic environment. Prior to the Civil War, the US maintained a bimetallic standard, which guaranteed the convertibility of dollars into either gold or silver at fixed exchange rates. But during the war, the government ended this convertibility and moved to a fiat system—which allowed the government to print money freely in order to fund wartime spending. The money printing that followed pushed up prices and in response, after the war, a push to return to a commodity-backed currency started to gain traction. This push was supported strongly by Northeast bankers/creditors, who had suffered losses as inflation eroded the value of their loans, but support was widespread among a population that had grown wary of inflation and saw a commoditybacked dollar as a return to stability. Debate ensued about how to reinstate the commodity backing of dollars. The idea of re-pegging at the prewar exchange rate to gold and silver was popular but presented problems. Gold had appreciated relative to silver and policy makers feared that a re-pegging to both metals at prewar exchange rates would drain gold reserves from the system, resulting in a de facto silver peg. This worry, the desire to support exchange rate stability by adopting a gold peg in line with Britain’s, and pressure from the banking sector (lobbying for a more deflationary policy) swayed policy makers toward a series of policies to return the dollar to a gold-backed monetary system, instead of the prewar bimetallic system. The Coinage Act of 1873 and the Resumption Act of 1875 decreased the money supply until the dollar was re-pegged to gold at the prewar price on January 1, 1879, and full dollar convertibility was reestablished. Relinking the dollar to gold pushed the US economy into two decades of persistent deflation. From 1875 to 1896, prices in the US fell by 1% per year and commodity prices fell nearly 3% per year (with farmers hurt further by overplanting in response to higher prices). Gold Price (USD)

CMD Prices

CPI (indexed to 1870)

55

180

50

160

45

140

40

120

35 100

30 25

80

20

60

15 50

60

70

80

90

00

40 50

60

70

80

90

00

Despite falling prices, prior to the 1890s the US economy prospered, and this growth exerted continued deflationary pressure on the economy—as the quantity produced increased but the money supply was fixed. But while the economy as a whole experienced strong growth, it produced big winners and losers, sowing the seeds of populism. The biggest losers of deflation were the debtors, who struggled to service their nominal debts as prices and incomes fell. Farmers were among the most affected, since their livelihoods revolved around a seasonal cycle of borrowing and repayment and commodity prices tumbled during the period. Conversely, the biggest winners of deflation were the lenders, who were mostly banks concentrated in the Northeast.

Growth 20% Real growth averaged over 4% from 1878-92

15% 10% 5% 0% -5% Panic of 1893

1870

1875

1880

1885

1890

-10% 1895

1900

“Free silver” advocates (“Silverites”) seized on this dynamic through the 1880s, declaring that a return to bimetallism would boost prosperity across economic classes and claiming that the dollar’s link to gold was a conspiracy perpetrated by economic elites. In addition, supporters promoted bimetallism as a way of decreasing inequality: those who held their wealth in silver tended to be poorer and would gain relative to wealthier people who chiefly held gold. Opponents of bimetallism argued that a gold-backed monetary policy aligned with global standards and facilitated international trade. The Panic of 1893 hit the US hard. As banks and businesses failed in droves, unemployment rose above 10% nationwide and certain hard-hit states saw unemployment rates over 30%. The economic collapse brought the simmering populism to a boil, and increased support for the easier money bimetallism would provide. Voters blamed the Democrats (who held the House, Senate, and presidency), leading to Democrats losing 127 seats in the House in 1894 (one of the largest percent swings in history) and setting the stage for the Free Silver wing of the Democratic party to subsequently take control of the party. Rise to Prominence Bryan first held public office after winning the congressional seat for the First District of Nebraska in 1890, but his true rise to prominence came several years later, when he embarked on a two-year national speaking tour after the panic. His renowned oratorical skills helped him build a reputation as an advocate for the common man, earning him the nickname “The Great Commoner.” As the crux of his platform, he championed “free silver” and the unlimited coinage of silver at the prewar 16:1 silver to gold exchange rate (“16:1” was widely featured in campaign marketing). Going into the Democratic convention in 1896, Bryan was a dark horse candidate—younger, far less experienced (having served as a representative for just five years), and not especially well-known compared to the other candidates. Bryan’s famous “Cross of Gold” speech (which was met with 30 minutes of cheering afterward) sealed his nomination. He attacked wealthy Eastern elites ("the idle holders of idle capital") for supporting the gold standard and urged the Democratic Party to join the side of the “struggling masses.” The Democrats’ 1896 party platform embraced the ideological shift signaled by Bryan’s candidacy—the resentment of globalized financial elites that had become intertwined with the economic arguments for “free silver”: “We are unalterably opposed to monometallism, which has locked fast the prosperity of an industrial people in the paralysis of hard times. Gold monometallism is a British policy, and its adoption has brought other nations into financial servitude to London. It is not only un-American, but antiAmerican, and it can be fastened on the United States only by the stifling of that spirit and love of liberty which proclaimed our political independence in 1776 and won it in the War of the Revolution.”

Ultimately, Bryan could not shake his Republican opponent William McKinley’s charges that bimetallism would cause rampant inflation, which convinced the key contingent of urban workers/union members to support McKinley. In an electoral map that is remarkably similar to what the US has seen in recent elections (though parties swapped), the election saw urban areas swing strongly toward McKinley, and southern/rural areas support Bryan. The Midwest was seen as the main battleground—Ohio ended up being the state that most mirrored national results.

After Bryan’s first campaign, gold discoveries in Alaska and South Africa and technological advancements in gold smelting (partly incentivized by the US gold standard) greatly increased the supply of gold and allowed the money supply to expand, curbing the disinflationary pressures. As popular support for bimetallism waned, Bryan rebuilt his platform by shifting his focus toward other common populist causes. Key Positions Bryan’s first presidential campaign in 1896 included populist positions that were distinctly agrarian and focused on the issue of bimetallism, namely: •

Championing the “free silver” movement to reinstate bimetallism at a ratio of 16:1, increase the money supply, and help debtors (especially farmers) service their debts.

In his later presidential campaigns, when bimetallism became less politically relevant, Bryan turned his antiestablishment rhetoric toward attacking entities he saw as taking power away from the common man: • • • • •

Supported antitrust actions to stem the rising influence of big corporations and banks Advocated for income and inheritance taxes Called for all campaign contributions made by corporations to be made public before Election Day Opposed the use of the Navy for the collection of private debts Opposed US imperialism, including its control over the Philippines

Populism-Related Quotes from Bryan • •

On the gold standard’s unfairness to debtors: "making a man pay a debt with a dollar larger than the one he borrowed...If this robbery is permitted, the farmer will be ruined, and then the cities will suffer." “The man who is employed for wages is as much a business man as his employer…the miners who go down a thousand feet into the earth, or climb two thousand feet upon the cliffs, and bring forth from their hiding places the precious metals to be poured into the channels of trade are as much business

•

• •

men as the few financial magnates who, in a back room, corner the money of the world. We come to speak of this broader class of business men.” “Upon which side will the Democratic Party fight; upon the side of ‘the idle holders of idle capital’ or upon the side of ‘the struggling masses’? That is the question which the party must answer first, and then it must be answered by each individual hereafter. The sympathies of the Democratic Party, as shown by the platform, are on the side of the struggling masses, who have ever been the foundation of the Democratic Party.” “Money is the worst of all contrabands because it commands everything else.” In response to a senator’s suggestion that a Robespierre may rise from among the silver advocates: ”What we need is an Andrew Jackson to stand, as Jackson stood, against the encroachments of organized wealth.”

Russia 1910-20s: Vladimir Lenin and the Russian Revolution While the Bolsheviks in Russia gained power through revolution, many of the underlying drivers of populism in other countries drove the revolution there. In particular, high inequality and weak economic conditions combined with an ineffective/out-of-touch government and very weak political institutions to produce a revolution and ideological extremes. The revolution and rise of communism in Russia is also interesting because it was relevant to the 1920-1940 developments around the world—the communist ideology was viewed as either a threat or an opportunity (depending on one's perspective) in a number of countries. Economic/Political Background In the early 1900s, most Russians were still extremely poor. It was only in 1861 that the Russian government abolished serfdom (a system in which large portions of the rural population lived essentially as slaves), but the former masters of serfs largely kept ownership over land, and the freed serfs were forced to pay a special tax to the state until 1907. Russia’s rapid industrialization in the late 1800s also created a large population of urban poor. Russia was ruled by an autocratic, Tsarist monarchy that was seen as ineffective and largely ignored the well-being of these lower classes. Russia began to descend into political chaos after the Russo-Japanese War (1904-05) as the defeat of the underprepared military spurred major labor strikes, military mutinies, and political violence—the Revolution of 1905. This revolution ended with military suppression and some minor political reforms: though an elective legislative body was created, suffrage was limited, and the tsar retained control over policy and appointment of ministers. Efforts to push through fundamental reforms – for example, Prime Minister Pyotr Stolypin tried to expand land ownership among the rural poor – were stymied by resistance from extremes on both sides. Stolypin himself was ultimately assassinated after several prior attempts on his life. World War I proved to be Tsarist Russia’s death knell: Russia’s military suffered severe defeats against Germany, leading to massive casualties, as well as high inflation and food shortages. In response, an initial revolution occurred in early 1917 (the February Revolution), forcing the abdication of Tsar Nicholas II and producing a liberal republic that legalized political parties. Rise to Power It was during Russia’s short-lived and weak democratic period that Vladimir Lenin and the Bolshevik Party were able to seize power. The new provisional liberal government, formed by members of the prior legislative assembly, was barely more effective than the earlier regime. It was forced to share power with the councils of workers (the “Soviets”) that helped organize the revolution and had more support from workers and soldiers. The provisional government became unpopular when it unsuccessfully continued Russian participation in WWI. With political parties no longer barred, Lenin decided to return from his exile in neutral Switzerland (with the help of the German army, which hoped to create further disorder in Russia). Lenin helped lead the Bolshevik Party to prominence, and in the October Revolution of 1917, he led a second (initially largely bloodless) revolution against the new Russian republic, seizing power. Hoping to give the revolution democratic legitimacy, the Bolsheviks still held a previously planned election in November—which they lost to a different socialist party (the Socialist Revolutionaries) that was broadly supported by the rural poor. But Lenin was able to take advantage of Russia’s weak democratic institutions, no rule of law, and disunity among the Socialist Revolutionaries to void the election and maintain control. Almost immediately, anti-communist forces rebelled against Bolshevik rule, sparking a brutal, multi-sided civil war that resulted in the victory of the more united and better organized Red Army, and the creation of the USSR in 1922. Immediately after the October Revolution, the Bolsheviks banned opposition newspapers. They publicly claimed that it was merely a "temporary measure" to "stem the torrent of filth and slander" by the "bourgeois press," and would adopt liberal press freedoms as soon as "normal conditions of social life set in." This never happened. The

Bolsheviks requisitioned all printing supplies— paper, presses, and other equipment— and soon tightened state control over the media, first by making advertising a state privilege and thereby cutting off the revenue source of independent papers, and later by instituting censorship bureaus. Economic Policies and Impact on Assets and Wealth Lenin aimed to create an economy where the means of production were state-owned and centrally planned. As a central Bolshevik policy, abolishing private property was one of Lenin’s first moves. Following the Russian revolution, the Decree on Land in October 1917 abolished private property and seized the estates of wealthy Russians with no compensation, giving the land to the state and allowing peasants to continue to farm. Lenin also launched a campaign to seize the personal wealth of the aristocracy and return it to the government, rallying mobs to prevent the wealthy from escaping the country: “The bourgeoisie are concealing in their coffers the riches which they have plundered, and are saying, ‘We shall sit tight for a while.’ We must catch the plunderers and compel them to return the spoils.” This was followed by the compulsory nationalization of Russian industry. Nationalizations started at the company level, with workers, empowered by Lenin’s decrees, replacing the factory owner with newly formed committees to run the business. Later on this process became more centralized, as entire sectors were nationalized at once as the Bolsheviks installed commissioners to oversee major corporations or industries. By mid-1918, the Bolsheviks had nationalized most factories, mines, and farms, and the government was strictly regulating production and prices—ordering workers to produce, then seizing and reissuing the output. Lenin’s nationalization of the banks appeared to precipitate an economic crisis. In late 1917, Lenin seized all deposits of the aristocracy and corporations, sparing only the small savings accounts of workers, effectively creating capital controls on the aristocracy’s ability to get wealth out of Russia. In addition, Lenin’s policies criminalizing capitalism expanded through 1918 to outlaw interest payments and he defaulted on all government debt (worth over $600 billion in today’s dollars), wiping out most of the wealth that investors had left in Russia. Liquidity seized up in response. A strike by bank workers in response to nationalization, starting in December 1917 and going for months, effectively shut down the banking system, meaning many newly nationalized businesses that relied on banks couldn’t pay their workers. The government responded to the crunch by printing money to fund the newly nationalized industries. Still, many factory committees, in search of someone to blame for late wages, fired managers and other senior employees, making it difficult to function and meet the decreed production quotas. At the same time, foreign governments retaliated against the Russian default by freezing Russia’s foreign assets. As controls escalated, many Russians tried to move what remained of their wealth, and often themselves, out of the country, reinforcing the squeeze. From 1917 to 1920, between 1 and 2 million Russians left the country and settled across the globe. The resulting economic collapse—caused by the combination of asset confiscation, civil war, and a banking crisis—was devastating. As capital pulled out, the ruble collapsed, and the economy spiraled into hyperinflation. By 1921, the Russian economy was operating at a fraction of its 1913 level—heavy industrial output was down 80%, coal production fell over 70%, and the grain harvest was cut nearly in half. The economic chaos, the requisitioning of food by the new government, and a drought created severe food shortages and resulted in a famine that caused around 5 million deaths. As the ruble lost all value, barter increasingly replaced money as a medium of exchange and wages were paid with goods rather than money. By the time Lenin shifted direction in 1921, nearly all private wealth in Russia had been wiped out. After the Russian Civil War, Lenin stepped back some from central economic planning, instituting the “New Economic Policy,” which Lenin described as an economic system including “a free market and capitalism, both subject to state control.” Through the policy shift, Russia opened for international trade, and some free enterprise was introduced (Deng Xiaoping was influenced by these policies when he opened China’s markets to the world in the

late 1970s/1980s). After Lenin’s death, Joseph Stalin shifted economic policy more toward collectivism and central rule of the economy, which led to widespread famine.

Russia: Asset Markets in the Early 1900s RUS Equity Index (Indexed to 1900) 250

Exchanges closed during WWI

Relative calm, continued industrialization

Markets briefly reopen, then wiped out by communist revolution

50

Worker strikes and mutinies after unsuccessful Russo-Japanese War 1902

1904

1906

1908

150

100

Balkan wars

1900

200

0 1910

1912

1914

RUS Gold Price (Local FX, Indexed to 1900, ln) 100,000

10,000 Hyperinflation during Russian Civil War. Currency loses all value.

1,000

100

10

1 1900

1902

1904

1906

1908

1910

1912

1914

RUS Long Rates 6% 5% Little exchange during the war, and then Lenin defaults on Russian debts

4% 3% 2% 1% 0%

1900

1902

1904

1906

1908

1910

1912

1914

44

Argentina 1950s: Juan Perón Juan Perón was a left-wing populist who served as president of Argentina between 1946 and 1955 and between 1973 and 1974. He first came to power following a period of political disillusionment and economic upheaval. A decade of rule by autocratic, corrupt political elites had produced dissatisfaction with the existing political establishment. At the same time, rapid economic change had disrupted the lives of many workers and exacerbated class tensions. As minister of labor in a military regime, Perón earned the support of working-class Argentines by supporting unions and rolling out improvements to working conditions. When the military leaders became wary of Perón’s increasing influence, they imprisoned him, but riots from his blue-collar base forced the military to release him and hold a free election. Those voters carried him to victory in the 1946 presidential election. Economic/Political Background In the first decade of the 1900s, Argentina was as rich as Western Europe, with GDP per capita at about 95% of the level of the UK and 80% of the US. Its agricultural-export-oriented economy drew many immigrants and attracted plenty of foreign capital to finance growth in railways and industries. Parallels between the United States and Argentina were common. The Great Depression was the beginning of a long period of political instability, poor governance, and relative economic decline for Argentina. During the Depression, Argentina devalued quickly (in 1929), but the big decline in global trade and the collapse in the prices of Argentina’s agricultural commodity exports caused unemployment to rise significantly. Taking advantage of the social unrest, right-wing business elites and the military launched a coup, ushering in what would subsequently be called “the infamous decade.” Importantly, the collapse in agricultural exports, coupled with the economic policies of the new government, produced a rapid structural shift in the economy that disrupted the economic conditions of many Argentines. The new government pursued economic self-reliance, attempting to shift the economy away from its traditional agricultural base and promote industrialization through a policy of import substitution (ISI). The traditional agricultural economy was left to stagnate as investment was diverted toward industry, many small landowners were ruined, and rural laborers lost their jobs. Unemployed agricultural workers migrated en masse into urban areas in search of work, and shanty towns sprang up around major cities. As a result, urban workers faced unprecedented competition from this influx of low-cost, non-unionized labor. Real wages declined, and labor unrest increased. Industrial unions became increasingly important and began agitating for workers’ rights, carrying out a series of strikes throughout the 1930s. The emergence of this group of increasingly politically active, dissatisfied urban workers set the stage for a populist to arise. Rise to Power Perón rose to power by positioning himself as an ally of Argentina’s disaffected working classes and labor unions. In June 1943, Perón had played a relatively minor role in the coup against the widely unpopular government that had ruled Argentina during “the infamous decade.” After the new military-dominated administration began a crack-down on communists and labor unions, Perón joined a growing wing of the party that was sympathetic to labor. Less than a year later, those dissenters seized power, and Perón was appointed minister of labor. He passed a series of social reforms to improve working conditions, planting early seeds of loyalty among workingclass Argentines and earning him the support of key unions. Conservative members of Perón’s party, fearing his rising prominence, arrested and imprisoned him in October 1945. A mass demonstration of loyal working-class supporters forced Perón’s release four days later. Perón then ran for president in June 1946. After the US ambassador to Argentina attempted to intervene in the election by accusing Perón of having had fascist ties, Perón successfully framed the election as a question of Argentinian nationalism against foreign imperialism. Widespread support among poor and working-class Argentines, combined with antagonism against meddling foreign interests, swept Perón to victory. He would be

re-elected in 1951, and would govern until he was deposed by a military coup in 1955 (returning briefly in 1973, until his death the following year). Key Policies Perón’s policies were characterized by aggressive interventions in the economy with the aims of achieving economic self-sufficiency and improving the condition of working-class Argentines. He centralized economic control in the hands of the state, promoted industrial development via import substitution and nationalized industries, and rolled out social programs and pro-labor policies. The defining thrust of Perón’s economic policy was his push toward self-sufficiency and industrialization through import substitution (ISI). In line with this, Perón took measures to discourage agricultural exports, while supporting the industrial sector and encouraging industrial capital goods imports. He engineered this shift by making extensive use of subsidies, price controls, capital and import restrictions, and having the state control the allocation of credit. Price controls kept agricultural prices low (discouraging further investment in agriculture), while import prohibitions encouraged substitution to domestically produced goods. Perón also used a system of multiple exchange rates to incentivize industrialization. Perón carried out extensive nationalization of industries. Between 1946 and 1948, he spent foreign reserves to buy out foreign owners of utilities, bringing the electricity, gas, railway, and telecom sectors (among others) under state control. In 1946, bank lending was de facto brought under state control: banks’ reserve requirements were raised to 100%, and the central bank took control of all lending decisions. The central bank then massively expanded credit to sectors like industry and housing but effectively cut off the agricultural sector. Perón pursued many policies aimed at improving the condition of working-class Argentines. He used price controls to cap the cost of basic necessities; implemented a minimum wage; and used executive decrees as well as his control over unions and industries to raise wages (real wages would rise 25% between 1947 and 1952). He established a national social insurance system and constitutionally enshrined social welfare provisions for all workers. He developed close ties with unions. In an echo of Mussolini’s corporatist approach, one of his first moves as minister of labor was to limit each industry to only one union and ban competing unions. Perón heavily attacked the press and limited press freedom. He nationalized the country’s stock of newsprint and took control over its distribution, reducing the allowances of papers that were hostile to his administration (de facto restricting the amount of physical pages of news that they could print). By 1946, he had established an official government bureau tasked with investigating “lies,” which, in practice, referred to any criticism of his government. The Economy, Asset Markets, and Wealth Perón’s import substitution policies and large spending programs initially boosted domestic demand and industrial profitability, but ultimately produced a much more inefficient economy. While growth averaged about 10% per year over Perón’s first two years in office, this proved short-lived. The economy weakened substantially in subsequent years—from 1949 to 1953, growth would average about 1%. Over time, his policies substantially eroded Argentina’s competitiveness and productivity. His pro-labor policies contributed to higher real wages, while import substitution supported inefficient industries, drove up domestic prices, and led to a decline in agricultural production and export revenues. Inflation rose rapidly, accommodated by money printing. Moreover, his program of nationalization discouraged foreign investment, and bureaucratic mismanagement and corruption contributed to inefficiency within the nationalized industries. Perón had to borrow substantially from abroad to finance the increasing subsidies necessary to support his economic program. These policies would ultimately produce unsustainable pressure on the balance of payments: Perón would engage in three successive currency devaluations totaling over 70% during his time in power, and default on Argentina’s debts in 1951. Markets became substantially less free under Perón. Capital controls and multiple exchange rates were in use throughout his time in power, and agricultural prices were heavily controlled by the state. The equity market

stayed open—after an initial bump over the first year of Perón’s presidency, returns stagnated, and equities performed poorly as competitiveness problems grew and balance of payments pressures worsened. With respect to Perón’s nationalizations of foreign investment, it’s worth noting that foreign owners were typically compensated (e.g., his utilities nationalizations were paid for using foreign exchange reserves). Following Perón’s time in power, Argentina continued its long decline in relative prosperity. The subsequent decades saw repeated periods of political instability, military coups, economic mismanagement, and balance of payments crises, each of which would echo the dynamics at play in the time of Perón.

GDP per Capita (% of US) (International Dollars) 90% 80% 70% 60% 50% 40% 30% 20% 1900

1910

1920

1930

1940

1950

1960

1970

47 Bridgewater® Daily Observations 3/22/2017

Argentina: Economic Conditions June 1946, Perón takes office Growth

Inflation 14% ISI initially stimulates growth, fades as inefficiencies worsen

70% Increased deficit spending, ISI, and pro-labor policies

12% 10% 8% 6%

Wage freeze, weak growth

45

0%

10%

-2%

0%

-4%

-10%

-20% 40

45

Currency in Circulation (Y/Y)

Gov Budget Deficit (USD, Mln)

50%

0

45%

-50 Persistent deficits

40%

-100

35%

-150

30%

-200

25% 20% Increased money printing

-250 Spending on nationalizations

-300

15% 10% 5%

-350 40

45

0% 40

Decline in exports and imports following shift to ISI policies

45

2,000

Imports

Export boom as agricultural commodity prices surge during/post WWII

40

45

Reserves (USD, Mln)

Trade (USD, Mln) Exports

40% 20%

-6% 40

50% 30%

4% 2%

Drought hurts exports

60%

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

Wartime export boom drives reserve accumulation

1,800

Perón spends down reserves to carry out nationalizations

1,600 1,400 1,200 1,000 800 600 400 200 0

40

45

48

Spot FX vs USD (Indexed to 1946) 120% Perón repeatedly devalues then pegs the currency. Multiple exchange rate regime and subsidies used to lessen impact on industrial sector.

100% 80% 60% 40% 20% 0%

1940

1945

1950

1955

Equity Prices (Indexed to 1946) Real

Nominal (Local FX) 4.0 3.5 3.0 Fiscal expansion, pro-industry policies

Growing uncompetitiveness, BoP problems

Perón completes nationalization of foreign-held utilities

1940

1945

2.5 CMD prices recover, wages frozen

1.5 1.0

Droughts in 1951 & 1952

1950

2.0

0.5 0.0 1955

Populism-Related Quotes from Perón •

• •

•

“Italian fascism led popular organizations to an effective participation in national life, which had always been denied to the people. Before Mussolini’s rise to power, the nation was on one hand and the worker on the other, and the latter had no involvement in the former. […] In Germany happened exactly the same phenomenon, meaning, an organized state for a perfectly ordered community, for a perfectly ordered population as well: a community where the state was the tool of the nation, whose representation was, under my view, effective. I thought that this should be the future political form, meaning, the true people’s democracy, the true social democracy." "Mussolini was the greatest man of our century, but he committed certain disastrous errors. I, who have the advantage of his precedent before me, shall follow in his footsteps but also avoid his errors." “The justicialista [i.e., Perónist] economy asserts that the production of the economy should first satisfy the needs of its inhabitants and only export the surplus; the surplus, nothing more. With this theory the boys here, of course, eat more every day and consume more, so that the surplus is smaller. But these poor guys have been submerged for 50 years; for this reason I have let them spend and eat and waste everything they wanted to for five years…but now we undoubtedly must begin to reorder things so as not to waste any more.” “We are not in any way enemies of capital, and it will be seen that we have been its true defenders. It is necessary to discriminate clearly between that which is international capitalism of large consortiums and that which is national industrial and commercial capitalism. International capitalism is an instrument of exploitation and national capitalism is one of welfare. The former represents…misery while the second is prosperity.”

France 1950s: Pierre Poujade, a Right-Wing Populist Pierre Poujade was the founder of a French right-wing populist protest movement that saw modest electoral success in the mid-1950s (enough so that his flavor of populism, “Poujadism,” is used in France today to pejoratively refer to any anti-elite movement). He was anti-establishment, anti-tax, anti-modernity, nationalist, and anti-foreigner, and received support from poorer rural voters and traditional small business owners. His movement had some success as a tax protest but never managed to transition beyond a narrow issues protest party. His movement devolved into infighting and fell apart quickly when Charles de Gaulle returned to power at the head of the new, more politically stable Fifth Republic in 1958 (though one of the youngest Poujadist MPs, Jean-Marie Le Pen, would later found the right-wing populist National Front). Economic/Political Background Post-WWII French politics were characterized by a series of weak, ineffectual governments, with administrations changing more than once a year on average throughout the Fourth Republic (1946-1958). In particular, government was seen as ineffective at dealing with France’s colonial legacy, with the colonies increasingly embroiled in conflict and slipping out of France’s grasp. Economically, this was a period of strong growth, high inflation, and rapid change. The Marshall Plan had helped rebuild France after the destruction of the war, but some felt the push toward modernization threatened traditional parts of France’s economy (smaller producers, retailers, and farmers). At the start of the 1950s, about half the population was self-employed; by the end of the decade, this would fall to about 30%. Moreover, the modernization of the French tax system following the war resulted in the creation of a business tax in 1948 and rising tax burdens through the early 1950s. Rise to Prominence Poujade’s movement began as a tax protest. At the time, many small French towns were in decline, as smaller local industries failed and people moved to cities during the push for economic modernization. It was relatively common for small-town shopkeepers to resort to tax evasion to pocket some extra income. In 1953, as a municipal councilor in rural France, Poujade began organizing local shopkeepers to resist visiting tax inspectors. The movement spread through the region, and within a few months Poujade had founded a party, the Defense Union of Shopkeepers and Craftsmen. Poujade positioned himself as a protector of small businesses and traditional French lifestyles that were threatened by social and economic change, particularly by the newer and larger industries emerging in France’s modern economy. He opposed modernization, industrialization, and urbanization, presenting himself as a defender of the common man (particularly the rural Frenchman) against the economic and political elite. He would boast about his lack of formal education. His support came primarily from shopkeepers and discontented poorer voters in rural areas. He also capitalized on nationalist dissatisfaction with decolonization—he supported a French Algeria and resented France’s withdrawal from Vietnam in 1954. He exhibited xenophobia and antiSemitism, attacking the then-prime minister’s Jewish background. His movement initially focused on carrying out strikes and protests against taxation. These protests culminated in a 1955 rally of 100,000 supporters in Paris, at which Poujade threatened a general tax strike and a larger march on Paris; tax concessions were granted two months later, when a new government came into power. In 1956, he decided to contest elections nationally; in a surprise outcome, his movement won nearly 12% of the vote, electing 52 representatives to parliament (about 10% of seats). His movement was short-lived and did not accomplish much in parliament. Infighting tore his party apart, and he failed to make the step from a protest movement to a party with a clear vision and broad appeal. Poujade himself was soundly defeated when he finally decided to stand in an off-cycle election; his movement disintegrated quickly with de Gaulle’s return to power (which brought stability to government) and was mostly a non-factor by 1958.

Key Positions Poujade’s movement never formed a government and didn’t receive much electoral success after the first election it contested; as such, it never really developed a comprehensive platform beyond its core protest areas. The movement was primarily concerned with opposing taxes; supporting traditional French small businesses and the condition of rural French people; opposing industrialization and modernization; and supporting French colonialism. It also had an anti-foreigner bent. Poujade himself also had anti-parliamentary sentiments: he initially refused to stand for office personally, claiming “democracy is done for in France,” and advocating a return to the Estates General from the dawn of the French Revolution. Populism-Related Quote from Poujade •

“I must systematically take the side of the small, the downtrodden, the trashed, the ripped-off, the humiliated who live with three times nothing.”

New Zealand 1970-80s: Robert Muldoon Robert Muldoon was a three-time prime minister of New Zealand, serving from 1975 to 1984. Though he was a career politician in a mainstream center-right party, he took a populist turn when he stood for election during a period of economic decline, promising a continuation of New Zealand’s generous social welfare programs and economic protections. His message resonated with elderly and rural voters, who helped bring him to power. His time in office was characterized by a mix of interventionist economic policies (including wage freezes and price controls), combined with heavy fiscal spending and the creation of a government-run pension system described as “the most generous universal pension scheme ever introduced in any country in any era.” He disdained technocrats and experts and frequently ignored their advice, instead pursuing a number of fiscally unsustainable policies. Economic/Political Background For New Zealand, the mid-20th century was an extended period of economic prosperity. New Zealand’s economy at the time was driven by agricultural exports and was heavily dependent on the UK market. This dependency was enforced through preferential treatment, where the UK guaranteed high buying quotas at a fixed price for New Zealand exports, and New Zealand imposed high tariffs on non-UK imports to encourage buying from the UK. While restrictive, this was extremely beneficial for New Zealand, which experienced 15 years of uninterrupted growth starting in 1952, close to zero percent unemployment, and among the highest living standards in the world. Because of these favorable trade terms and a growing economic base, the government was able to operate generous pension and social welfare programs. Over the same period, New Zealand politics were largely quiet and uncontroversial. The country had a two-party system (the left-leaning Labour Party and the right-leaning National Party), yet both were in agreement on most economic issues. The long period of prosperity came to an end as the economic situation worsened over the late 1960s and early 1970s. In 1955, the UK had stopped guaranteeing a fixed price for New Zealand exports, leaving New Zealand more vulnerable to shifts in trade. Eventually, commodity-price-driven balance of payments pressures (wool prices collapsed) led to a currency devaluation that contributed to inflationary pressures, which were later exacerbated by the collapse of the Bretton Woods system. Ultimately, this prompted the government to institute price and wage freezes. This series of events had a large impact on New Zealanders’ standard of living, which fell from third highest in the world in 1953 to 22nd highest by 1978. The subsequent oil shock made things even worse—growth slowed, equities crashed, inflation hit double digits in 1975, and balance of payments pressures led to another devaluation. While New Zealand’s political system remained stable, the political consensus around social welfare spending began to break down as the economic situation worsened. The ruling Labour Party favored fiscal austerity coupled with trade liberalization. These reforms were met with strong opposition from the National Party, which remained staunchly protectionist and advocated a continuation of the government’s substantial social spending. Rise to Power Muldoon was a career politician in the center-right National Party who rose to power mostly along a traditional political path, spending over two decades gradually rising through the ranks of his party before his election as prime minister. For most of this time, he was known as an aggressive and confrontational statesman, but also a conventional conservative (favoring generally limited government spending and private enterprise). In contrast to his conventional political background, Muldoon’s 1975 electoral campaign was classically populist, with an emphasis on bolstering social welfare and providing relief from economic pain through protectionism and government intervention. A cornerstone of his platform was to repeal the Labour government’s pension scheme (which had a paycheck-deduction component) and replace it with a universal, government-paid program. His campaign slogan—“New Zealand – The Way You Want It”—reflected his platform of crowd-pleasing social welfare programs and economic protectionism.

Muldoon’s populist image benefited from his opponents’ attempts to label him as crass and emotional. This characterization backfired as Muldoon embraced the role and became popular with rural, older voters. His supporters named themselves “Rob’s Mob” in solidarity with his perceived empathy for “the ordinary bloke.” Muldoon further emphasized the divide between himself and his opponents by running a divisive and personal campaign, which included some of the first attack ads in New Zealand politics. In one ad—a Hanna-Barberacreated cartoon—the National Party accused Labour of being communists because they were attempting to liberalize the pension system, using dancing Cossacks and Russian architecture to hammer the point home. Though mild by today’s standards, the ads were shocking breaches of protocol for the time. Muldoon ultimately won the election by a large margin. Key Policies Muldoon’s policies were characterized by fairly heavy-handed interventions in markets (freezing wages, price controls, and subsidies) and a large increase in social spending (through the creation of an extraordinarily generous pension scheme), funded through deficit spending. He also pursued increased free trade with Australia, which he saw as an effective way to bolster New Zealand’s export-oriented economy. Muldoon struggled with four economic problems while in office—the current account deficit, inflation, the fiscal deficit, and unemployment. He tried to solve the current account deficit and unemployment by stimulating exports through subsidies, and he tried to solve inflation through intermittent government-imposed wage and price freezes. With respect to the fiscal deficit, he assumed a pickup in growth would increase government revenues and make his massive expansion on pension spending sustainable in the long run. As such, deficits expanded massively under Muldoon. He was also reluctant to meaningfully devalue the New Zealand dollar or curb domestic consumption. It’s worth noting that Muldoon broadly rejected his own Treasury’s counsel (which was essentially to enact liberal reforms) when pursuing these policies, reflecting his disdain for technocrats. Here is level-down detail on his particular policies: •

• •

•

• • •

Pension program: In 1977, Muldoon passed the “National Superannuation” pension program, which stipulated that every New Zealander over the age of 60 would be given monthly payments equivalent to 70% of the average wage, regardless of their savings and without making contributions to the system. One economist called the program, “Perhaps the most generous universal pension scheme ever introduced in any country in any era…it was neither affordable from the existing tax base nor sustainable in the long term for demographic reasons.” The pension almost immediately pushed the government from a fiscal surplus into a persistent fiscal deficit. Farm subsidies: Muldoon heavily subsidized agricultural production in an attempt to boost exports. According to one researcher, “by 1984, nearly 40 percent of the gross income of New Zealand farmers came from government subsidies.” Wage and price freezes: Muldoon implemented a 12-month wage freeze in late 1977 in an attempt to control inflation—restricting the right of unions to bargain and the right of companies to freely set wages. He took more extreme measures in 1982, imposing a national wage and price freeze that greatly antagonized both unions and business owners. Capital and import controls: Muldoon continued pre-existing controls on foreign direct investment, and required New Zealanders to seek government approval to invest money offshore in financial assets. To protect foreign reserves, Muldoon also maintained pre-existing import controls that required all importers to obtain government licensing and approval. FX policy: Muldoon resisted meaningfully devaluing the NZD. When faced with balance of payments pressures, he favored a crawling peg and a slow devaluation. Near the end of his time in office, he reestablished a hard peg. Heavy spending on public-private coordinated infrastructure (most projects ended up unviable). Trade liberalization: In an attempt to stimulate exports, Muldoon renegotiated the New ZealandAustralia Free Trade Agreement (NAFTA) and expanded its mandate—eliminating all tariffs between the two countries and standardizing the legal framework for goods sales between the two countries.

The Economy and Asset Markets New Zealand experienced volatile growth, high inflation, and significantly higher unemployment during Muldoon’s time as prime minister. While many of these conditions arose from exogenous circumstances (such as the end of the Bretton Woods system and the 1970s oil shocks flowing through to high inflation globally), other changes were a direct result of Muldoon’s policies. In particular, Muldoon’s extremely generous universal pension program created a persistent fiscal deficit, and his price and wage freezes exacerbated the severity of the 1977 contraction. His reluctance to allow sharp devaluations in the New Zealand dollar (he instead would switch between trying to hold the line and allowing gradual, crawling devaluations) contributed to balance of payments pressures throughout his time in office. New Zealanders living through this period experienced an acute and painful inflationary recession, followed by a short recovery that led into another difficult period of high inflation and rising unemployment. As for assets, equity prices rose substantially after the currency was allowed to depreciate, though for much of Muldoon’s time in office they did not keep up with inflation.

Growth Muldoon's Time in Office

Inflation Muldoon's Time in Office 15.0% 12.5%

20.0%

Oil shock, BoP crisis

17.5%

10.0%

15.0%

7.5% 12.5%

5.0% 2.5%

10.0%

0.0%

7.5%

-2.5%

Oil shock, BoP crisis

5.0%

-5.0% 2.5%

70

75

80

70

Unemployment Rate Muldoon's Time in Office

75

80

Government Budget Deficit (%GDP) Muldoon's Time in Office Pension program takes effect

6% 5%

-2%

3%

-3%

2%

-4% Subsidy spending

1% 0% 75

80

0% -1%

4%

70

1%

70

75

54 Bridgewater® Daily Observations 3/22/2017

80

-5% -6%

Current Account (%GDP) Muldoon's Time in Office

Spot FX vs USD Muldoon's Time in Office 1.50

1974-75 BoP crisis

2.5% 0.0%

1.25

-2.5% -5.0%

1.00

-7.5%

Oil shock and BoP crisis

Deficit persists

-10.0%

0.75

Crawling peg

-12.5%

0.50

-15.0% 70

75

70

75

Equity Prices (Indexed to 1976) Long Rate Short Rate Muldoon's Time in Office

Real Nominal Muldoon's Time in Office

30% 700 600

25%

500

20%

400

15%

300

10%

200

5%

100 0 70

75

70

75

55

Venezuela 2000s: Hugo Chávez Hugo Chávez was a left-wing populist who governed Venezuela from 1999 to 2013. He came to power following years of political and economic decline that saw living standards fall, corruption spread, and inequality rise. His rise to power capitalized on resentment among the poor and working classes, who were moved by his promises to end corruption, eradicate poverty, and reform politics. When in government, he centralized power in the presidency and allowed corruption to spread unchecked. Economically, he pursued socialist economic policies with the aim of redistributing wealth and improving the conditions of the disadvantaged: intervening in markets, nationalizing businesses, placing controls on prices and capital flows, and massively expanding government spending. These economic policies contributed to continual currency declines, high inflation, and, ultimately, hyperinflation. Economic/Political Background In the 1970s, Venezuela was a relatively prosperous and stable country. Politics was dominated by two major parties, one of the center-right and one of the center-left, that cooperated to support orderly transitions of power and keep other parties (in particular the communists) from gaining influence. The 1973 oil shock had substantially boosted Venezuela’s oil profits and allowed for a massive increase in government spending. Growth boomed, and living conditions improved for much of the decade. That all changed in the 1980s, as the economic and political situation deteriorated materially. The Latin American debt crisis brought recession to much of the region. In Venezuela, growth began to slow in the late 1970s, and the economy entered a prolonged recession in the early ’80s. Meanwhile, rising inflation in the late ’70s had contributed to an overvalued bolivar. And rising oil prices were no longer a support to incomes: oil prices peaked in 1980 and would decline substantially in real terms over the rest of the decade. Living standards fell: by the mid-1980s, real GDP per capita was down about 25% from its 1977 peak. In 1983, Venezuela devalued its currency by almost 70% and defaulted on its external debts. Politically, there was growing dissatisfaction with the two main parties, which were increasingly viewed as corrupt. The oil boom had exacerbated perceptions of income inequality, and poorer Venezuelans felt left out. The hegemony of the two main parties was beginning to erode—by 1993, a former president would run on his own third-party ticket and win, bringing about an end to the old political order. Venezuela’s international relations largely hinged on its bilateral relationship with the US. This relationship was broadly strong at the government level due to economic ties, but there was a great degree of resentment over the power of US oil corporations in Venezuela, which created anti-American and anti-elite sentiments among segments of the population. Rise to Power Chávez’s rise to power began within the military. Early in his military career he was inspired by left-wing military dictators in Peru and Panama (whose ideals and policies he admired), and he was soon exposed to Marxist literature, which resonated with him. He became convinced that a left-wing government was needed to serve the interests of the people, even if it had to be installed through a military coup. He began building support for a leftwing revolutionary movement within the armed forces, though with no immediate plan to act. Social and political instability worsened following the 1989 election of Carlos Andrés Pérez, a centrist. While Pérez had argued fiercely against seeking help from the IMF during his campaign, once he was elected he accepted an IMF loan in exchange for engaging in Washington Consensus reforms. His ensuing cuts to government spending and liberalization of domestic gas prices (which caused an immediate rise in prices) were met with outrage. Widespread protests and looting ensued. The protests were repressed violently by the government, resulting in the deaths of hundreds of protesters. In response, Chávez began planning a coup, which he would launch three years later in 1992.

The coup failed. Chávez did not have enough support in the military and the coup was poorly executed; he was captured before he could seize the president. However, the coup made Chávez famous. He became a media star; the face of resistance to the policies of the current regime. Supporters carried out pro-Chávez demonstrations. After the president was forced out of government in a corruption scandal the following year, the newly elected president released Chávez from prison. Chávez spent the next few years building support for his movement. The economic and social situation continued to be rocky—crime was on the rise, growth was moderate, and inflation was now running at around 30-40%, (peaking at over 100% in 1996 following yet another sharp devaluation in the bolivar). Chávez considered a second coup, but, after seeing one of his allies win a state election, he was persuaded to stand in the presidential election. He formed a political party in 1997 and ran on a platform of ending corruption, eradicating poverty, and reforming politics to end the old system of two-party dominance in the 1998 presidential election. He won support of some of the smaller left-wing parties. Above all, his message resonated with poor and disenfranchised Venezuelans—his support in his first election came disproportionately from the poor (though he also received substantial support from the middle class). His personal charisma and adoption of a more “working-class” style of communication reportedly helped him while campaigning. He won the election with 56.2% of the vote and was inaugurated in February 1999. He would be re-elected three times, serving as president until his death from cancer in 2013. Key Policies Chávez governed as a left-wing socialist with an authoritarian streak. He redistributed wealth and land to benefit the poor, rolled out poverty-reduction programs, and provided poor Venezuelans with free health care and housing subsidies. His spending was financed through a mix of oil revenue, deficit spending (particularly in his later years in office), and money printing. He intervened in markets and business; while he allowed private business to continue, he showed little respect for property rights, nationalized a number of companies, and imposed price controls on food. He resorted to exchange controls early on, in response to persistent currency weakness and capital flight. Measures of economic freedom declined substantially over the course of his presidency. Politically, he concentrated power in the presidency and exerted control over much of Venezuelan society. Elections continued throughout his 14 years as president—he would be re-elected in all three of the subsequent elections he stood in—though he used his powers to stack the deck against the opposition. While the opposition was allowed to field candidates and received a substantial share of the vote, Chávez’s allies engaged in gerrymandering, and intimidated or banned individual opposition candidates, as well as used state resources for propaganda purposes. Corruption spread during his time in office. That said, it looks like he managed to maintain substantial popular support throughout his rule (with the major exception of the upper classes). His opposition to American “imperialism” and his redistributionist policies helped galvanize his supporters. Chávez also cracked down on freedom of the press. In response to criticism during his first couple of years in power, Chávez passed laws that would allow him to fine and shut down broadcasters, increase penalties for those who defamed the president, and threatened critics with prosecution or revocation of their licenses. He would call out reporters and news outlets he disliked, and his supporters carried out a number of violent attacks on anti-government media outlets. These measures encouraged self-censorship and substantially reduced freedom of the press. At the same time, Chávez expanded government-controlled media. Famously, he used his control of state television to give himself his own talk show, which provided him a regular platform to speak directly to his supporters.

The Economy, Asset Markets, and Wealth Chávez intervened heavily in the economy and asset markets, employing measures ranging from nationalizations, to capital controls, to price fixing. His policies contributed to persistent currency weakness, high inflation, capital flight, inefficiencies, and a substantial increase in indebtedness. Chávez’s program of nationalizations resulted in a substantial forced transfer of assets into the hands of government. Sometimes these were compensated (generally at some later date, after a complaint by the former owners); other times there was no compensation. Nationalizations touched broad sectors of the economy (more than 1,000 businesses were nationalized), and the assets seized ranged from ownership in companies, to individual projects, to land, and even to homes. In terms of industries, Chávez’s government seized foreignowned oil assets; agricultural companies and land; small and medium banks; the entire cement sector; gold mining projects; steel mills; telecoms; power producers; and assets from several other industries (including private homes to use for state-run tourism). Often these assets were seized from foreign corporations, though occasionally Venezuelan-owned companies were nationalized as well. As for asset markets: •

•

•

Chávez first imposed capital controls after a general oil workers’ strike in 2003 produced worries of capital flight. The controls were later expanded into a complex, multiple-exchange rate regime, with quotas and approvals processes required to access the various rates; this resulted in the emergence of a black market that typically traded at a significant discount to official rates. The currency experienced persistent and substantial depreciation throughout Chávez’s time in power. Apart from a brief technical default on its external debt in 2005 (when, during a PDVSA strike, it missed part of a payment on oil-indexed bonds for a technical reason), Venezuela generally continued to pay its foreign bond holders throughout Chávez’s time in power. The spreads on its bonds rose substantially from 2008 onward, as budget deficits continued to spiral out of control and the balance of payments situation worsened. Venezuela’s equity market remained open and operational throughout Chávez’s tenure (apart from some short disruptions), although government takeovers reduced the number of companies trading on the exchange and the last IPO under Chávez was in 2005.

Chávez’s economic policies ultimately placed Venezuela on a path to depression and hyperinflation (though high oil prices delayed the reckoning for a long time). Heavy government spending and accommodative monetary policy contributed to persistent high inflation, while capital controls and nationalizations discouraged foreign investment and encouraged capital flight. The government allowed persistent currency devaluations, which worsened the inflation, which it would accommodate with continued easy policy and printing. Nationalizations and price controls contributed to inefficiency and resulted in shortages of goods. Venezuela’s oil industry went into decline as a result of underinvestment, inefficiency, and corruption: production peaked the year before Chávez took power and had fallen by more than 25% by the time of his death. The government borrowed substantially in foreign currencies to be able to continue its social spending programs; by the end of Chávez’s time in power, this had resulted in spiraling deficits and unsustainably high debt burdens. Following the decline in oil prices in the years after Chávez’s death, the country is now facing hyperinflation.

Growth

Core Inflation

Rises to over 300%

20% 15% 10%

125%

100%

5% 75%

0% -5% -10%

Chávez elected

FX devaluations begin

-20%

Oil workers’ strike

25%

Chávez elected

-25% -30%

80

90

50%

-15%

0% 80

Output Gap

90

10%

5%

5%

0%

0%

-5%

Chávez elected

-10%

Chávez elected

-10%

Growing social spending, nationalizations, falling revenue

-15% -20%

90

Government Budget Deficit (%GDP)

-5%

80

80

Spot FX vs USD (Indexed to 1982)

90

10% 0%

80%

-10%

70%

-20%

60%

-30%

50%

-40%

40%

-50%

30%

-60%

20%

-70%

10%

-80%

0% 90

-25%

Chávez elected

90%

80

-20%

1yr Change in Spot FX vs USD 100%

Persistent currency devaluations

-15%

80

90

59

Money Supply Growth (M1)

External Debt (USD, Bln)

Significant money printing Chávez elected

150%

130

125%

120 110

Rapid increase in external debt

100%

100 90

75%

80

50%

Chávez elected

70

25%

60 50

0%

40 80

90

00

10

75

80

85

Exports (USD, Bln) Oil Price ($/bbl)

90

95

00

05

10

15

Current Account (%GDP)

125

15% Weaker despite high 10% oil price

125 100 100

5% 75 75

Chávez elected

50

0%

50

25

-5%

Chávez elected

25 80

90

00

10

75

80

85

90

95

-10% 00

05

10

15

Equity Prices (Local FX, Indexed to 1999) Hard Currency Bond Spread Real 35%

100

30%

90

25.0 22.5

Accelerating inflationary spiral

80 25%

Chávez elected

20% 15%

Nominal

70

20.0 17.5

60

15.0

50

12.5

40 30

5%

20

5.0

10

2.5

0% 75

80

85

90

95

00

05

10

15

10.0

Chávez elected

10%

7.5

0

0.0 75

80 85

90 95

60 Bridgewater® Daily Observations 3/22/2017

00 05

10

15

Note: Capital controls limit the ability of foreign investors to effectively access the domestic market

Populism-Related Quotes from Chávez • • • •

“We must confront the privileged elite who have destroyed a large part of the world.” (2002) “Privatization is a neoliberal and imperialist plan. Health can’t be privatized because it is a fundamental human right, nor can education, water, electricity and other public services. They can’t be surrendered to private capital that denies the people from their rights.” (2005) “Let the dogs of the [US] empire bark, that’s their job; ours is to battle to achieve the true liberation of our people.” (2005) “The world has an offer for everybody but it turned out that a few minorities—the descendants of those who crucified Christ, the descendants of those who expelled Bolivar from here and those who in a certain way crucified him in Santa Marta, there in Colombia—they took possession of the riches of the world, a minority took possession of the planet’s gold, the silver, the minerals, the water, the good lands, the oil, and they have concentrated all the riches in the hands of a few; less than 10 percent of the world population owns more than half of the riches of the world.” (2005)

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