Why do we have to understand how populism shapes institutions?

Nicolás E. Magud and his coauthors explore recent episodes of populism in Latin America and how they combined large commodity windfalls with political strategies that expanded the role of the state and loosened institutional constraints. Those combinations can generate booms that look successful politically in the short run but often end in fiscal, balance-of-payments, and institutional crises. Academics, policy advisers, and central bankers must distinguish temporary gains in social indicators from permanent improvements .

Three macroeconomic patterns were observed

First, external tailwinds, notably commodity price windfalls, increase the likelihood that populist leaders remain longer in power. The commodity supercycle of the 2000s and loose external financing materially extended several recent populist tenures. Second, populist regimes typically pursue expansionary fiscal policies, increase public spending, and often rely in part on inflationary financing or central-bank credit; these policies generate short-lived domestic demand booms, real exchange-rate appreciation, and stronger consumption and imports. Third, those booms are frequently unsustainable: once external conditions reverse or buffers deplete, output stalls or falls, inflation accelerates, reserves fall, and current-account balances deteriorate. Quantitatively, local-projection results confirm these unstainable dynamics across a wide sample of episodes.

Institutional deterioration connected to populist rule

Populist leaders often weaken democratic accountability, erode property-rights protections, politicize public institutions, and expand executive authority—changes that tend to outlast the administration that enacted them. Institutional weakening reduces policy credibility, raises risk premia, and makes macroeconomic stabilization harder after the boom ends. The country case studies show typical sequences: windfall-funded expansion, concentration of power (sometimes via constitutional change), gradual depletion of buffers, and eventually macroeconomic crises or abrupt regime change. Econometric estimates show that, controlling for initial conditions, degree of democratic development, and terms-of-trade swings, populist episodes are associated with statistically significant deteriorations in institutional scores and fiscal balances and external sector variables over medium horizons.

What data and which methods were applied?

The authors use a mix of quantitative and narrative evidence. Quantitatively, they construct an unbalanced panel covering about thirty-three Latin American and Caribbean countries from 1970 to 2025 and compile standard macro series (output, trade, fiscal balances, inflation, reserves) together with institutional indicators (democratic accountability, property rights, government effectiveness, business and financial freedom) from widely used sources. They identify populist governments using a discourse-based measure drawn from political-science work that codes leaders’ rhetoric. Empirically they run panel regressions to link external conditions to the duration of populist rule, and they use local projections to trace the dynamic effects of populist administrations on macroeconomic and institutional outcomes. The analysis is complemented by

focused country case studies (Argentina, Bolivia, Ecuador, Venezuela) that illustrate mechanisms and timing.

What policymakers should take away

Policymakers and international partners should treat commodity windfalls as transitory and use them to build buffers, fiscal savings, reserve accumulation, and public investment focused on productivity, rather than to fund permanent recurring commitments. Preserving central-bank independence and institutional checks is crucial: legal and operational safeguards reduce the temptation to monetize deficits and protect policy credibility when the cycle turns. At the same time exchange-rate flexibility and prudent external-debt management reduce the risk of sudden external adjustments that amplify crises. The authors caution against one-size-fits-all condemnations: some redistributive measures improved social outcomes without triggering collapse in specific cases, so policy responses should combine social protection with rules and transparency to avoid long-run damage.

Lessons from Populism in Latin America

Authors:

Nicolás E. Magud (International Monetary Fund)

Antonio Spilimbergo (International Monetary Fund)

Alejandro Werner (Georgetown University)

(paper presented at the 2nd Economic Policy: Papers on European and Global Issues Conference)