Populist Leaders and the Economy

Principal investigator: Omar Barroso Khodr

Authors: Funke, Schularick and Trebesch (2023)

Original title: Populist Leaders and the Economy

Location of the Intervention: Comparative global analysis between countries

Sample Size: 60 countries, encompassing all current OECD/EU members, the nine largest countries in South America, and ten major emerging markets in Asia and Africa, representing more than 95% of global GDP.

Primary Variable of Interest: Real annual growth rate of GDP per capita.

Type of Intervention: Case study in applied political economy.

Methodology: Fixed Effects, Causal Inference, and Synthetic Control

Summary

According to Funke, Schularick, and Trebesch (2023), populism at the national level is at its peak, with more than 25% of nations currently governed by populist leaders. Given this scenario, the authors ask: how do economies behave under populist governments? To answer this question, they constructed a new historical and comparative database between countries, allowing them to analyze the macroeconomic trajectory of populism over time. The authors identify 51 populist presidents and prime ministers between 1900 and 2020 and demonstrate that the economic cost of populism is high. After 15 years, GDP per capita tends to be approximately 10% lower compared to a counterfactual scenario without populism. Economic deterioration, loss of macroeconomic stability, and institutional erosion often go hand in hand under populist administrations.

1. Policy Problem

Funke, Schularick, and Trebesch seek to identify and quantify the economic consequences of populist leadership, revisiting the classic view that populism produces a brief surge of growth followed by a “self-destructive” collapse. They note that influential studies, such as Dornbusch and Edwards (1991) for Latin America, describe a “populist cycle” based on expansionary fiscal policies that end in crisis.

However, the authors argue that there is still a scarcity of rigorous quantitative evidence on the macroeconomic effects of populism—especially in advanced economies—and that, for a long time, the phenomenon was treated as restricted to the developing world. Thus, this article seeks to fill this gap by offering a systematic, long-term, and comparative analysis of economic performance under populist governments.

A second objective is to address the methodological challenge of consistently identifying populist leaders, a necessary condition for causal inference. To this end, the study compiles a new dataset covering 60 countries between 1900 and 2020, representing more than 95% of the world's GDP. The classification of the nearly 1.500 leaders follows a widely accepted definition in political science, centered on the rhetoric of opposition between "the people" and "the elites."

Finally, the article estimates the magnitude and channels of the economic effects of populism. Using different causal inference strategies—event studies, inverse probability-weighted local projections, and synthetic control—the authors find severe and persistent economic costs. On average, after 15 years, real GDP per capita is about 10% lower than in a counterfactual scenario without populism, a consistent result across regions, periods, and ideological orientations.

Additionally, the study also identifies associated political consequences: economic disintegration (decline in trade and financial integration), unsustainable macroeconomic policies (increased debt and inflation), and institutional erosion (weakening of checks and balances, judicial independence, and press freedom). These findings suggest that populism erodes economic advantages normally associated with robust democratic institutions.

2. Policy Implementation Context

This study situates its contribution within the existing literature on populism, highlighting both the conceptual consensus and the scarcity of quantitative economic analyses. Although the classical view—influenced by works on Latin America (Sachs 1989; Dornbusch and Edwards 1991)—maintains that populist leaders generate a brief cycle of growth followed by a “self-destructive” crisis, systematic evidence beyond this context, especially for advanced economies, remains limited. This research seeks to fill this gap by offering a comprehensive quantitative reassessment of the macroeconomic effects of populism since 1900.

Methodologically, the study is anchored in the modern definition of populism as an opposition between “the people” and “elites” (Mudde 2004), now widely adopted in economics as well (Guriev and Papaioannou 2020). In this context, the authors coded nearly 1.500 leaders based on 770 sources, distinguishing their approach from alternative methods, such as textual discourse analysis (Hawkins et al. 2019). Comparison with existing databases reveals high agreement (86–91%) when similar definitions are used, with divergences arising only when other classifications incorporate economic outcomes.

Finally, the article positions its contribution within the broader agenda on leaders, politics, and economic performance. It engages with studies investigating the impact of leaders or parties on the economy (Jones and Olken 2005; Blinder and Watson 2016) and with research on the economic determinants of populism (Funke, Schularick, and Trebesch 2016; Rodrik 2018; Guiso et al. 2018). However, it notes that few studies examine the economic consequences of populist leaders themselves. Thus, its evidence on the substantial and persistent negative effects of populism constitutes a direct contribution to a field that is still relatively unexplored but highly relevant to the public policy debate.

3. Evaluation Details

The authors evaluate political leaders based on a conceptual definition of populism, not on policy outcomes or institutional characteristics. The central definition requires that the leader divide society into two antagonistic groups—"the people" versus "the elites"—and claim for themselves the status of the sole legitimate representative of the "true people." This definition is explicitly applied regardless of the leader's position on the left-right ideological spectrum, their economic policies, or the country's level of development.

The authors deliberately exclude policy outcomes (such as social spending or fiscal deficits) from the classification criteria, differentiating their approach from previous economic definitions of populism. To maintain conceptual focus, they distinguish outright populists from charismatic or confrontational leaders who do not fit the populist logic—such as Thatcher, Reagan, and Putin—by ​​verifying whether the "people versus elites" conflict occupies a central position on the leader's political agenda.

To operationalize this assessment, the study establishes a coding procedure based on political discourse, especially in identifying the targets of the leader's criticism. Left-wing populists are defined as those whose anti-elitism is predominantly expressed in economic terms, targeting financial, capitalist, or oligarchic elites. Right-wing populists, on the other hand, are characterized by a discourse formulated in cultural terms, directed at foreigners, ethnic or religious minorities, and political elites accused of protecting them. It is important to note that the study does not use other characteristics frequently associated with populism—such as a personalist style, anti-pluralism, provocative language, or affinity with conspiracy theories—due to the difficulty of quantifying them consistently in all cases.

The sample analyzed covers 60 countries, including all current OECD/EU members, the nine largest countries in South America, and ten major emerging markets in Asia and Africa, representing more than 95% of global GDP. The unit of analysis is the head of the central government (president or prime minister), with timelines extracted from the Archigos dataset and extended to December 2020. Between 1900 and 2020, 1.482 leaders were identified (1.853 terms), of which 51 were classified as populists (3,4% of leaders), responsible for 72 terms (3,9% of the total). These terms are distributed almost equally between left-wing populists (35) and right-wing populists (37). Geographically, Latin America and Europe concentrate the majority of cases, with a predominance of left-wing populists in Latin America and right-wing populists in Europe, while Asia, North America, Africa, and Oceania show more scattered occurrences.

4. Method

The study methodology is organized into three main quantitative approaches: (i) descriptive growth gap analysis, (ii) panel event study, and (iii) two causal inference techniques—inverse likelihood weighted local projections (IPWRA-PL) and the synthetic control method. The objective is to estimate the impact of a populist leader coming to power on real GDP per capita growth, compared to a counterfactual scenario without populism.

Next, the descriptive analysis follows Blinder and Watson (2016). The authors calculate a “performance gap” by subtracting from the annual growth rate under populists both the country's long-term trend and contemporary global growth. This gap is systematically negative, between -0,5 and -1 percentage point in the 5 and 15 years following the rise of populism.

In this way, the study applies a panel event study with fixed country and year effects. A dummy variable identifies the 5 or 15 years following the start of a populist government, and the dependent variable is the annual growth of GDP per capita. The model controls for inflation, trade openness, and various financial crises. The coefficient associated with populism indicates a robust penalty of approximately 1 percentage point per year.

To capture the temporal dynamics, local projections are used (Jordà, 2005), estimating the cumulative variation of GDP per capita after the transition to a populist government, controlling for lags in growth, inflation, institutional quality, democracy, and crises. To mitigate endogeneity, the IPWRA-PL estimator is applied: a logit model estimates the probability of a populist taking office (increased by banking crises and growth declines), and the local projections are reweighted by inverse probabilities. The results confirm a significantly weaker growth trajectory, with losses exceeding 10% after 15 years.

Finally, the synthetic control method constructs a counterfactual “doppelgänger” for each populist episode, matching donor countries that replicate the previous trajectory of the target country (typically 15 years prior). Matching variables include real GDP, institutional quality, democracy, and crisis history. Impact is measured by the “doppelgänger gap,” that is, the difference between observed GDP and the synthetic counterfactual GDP after the populist’s arrival. Uncertainty is assessed by forecast intervals that incorporate in- and out-of-sample errors, based on simulations and sub-Gaussian bounds.

5. Main results

The study presents several relevant findings on the economic and institutional consequences of populist leadership. First, despite the rhetoric of defending "the people" and social justice, there is no evidence of a significant reduction in inequality. Using synthetic control methods applied to the post-tax Gini index and the share of labor income, the authors show that the arrival of populists to power does not statistically significantly alter income distribution or the share of labor income for up to a decade after taking office.

Secondly, populism is associated with a decline in international economic integration. Under populist governments, import tariffs diverge from the counterfactual and fall less than expected; trade openness decreases; and financial integration—measured by the KOF Financial Globalization Index—recedes by about five points relative to the synthetic control. These results suggest that populists frequently implement agendas of economic nationalism and protectionism.

Third, on the macroeconomic level, the study confirms the pattern of unsustainable policies described by Dornbusch and Edwards. Public debt as a proportion of GDP is persistently increasing, accumulating up to an additional 10 percentage points after 15 years. Inflation also tends to rise, although with less precise estimates, especially when excluding episodes of previous hyperinflation.

Fourth, the authors find robust evidence of institutional erosion. Based on the project indicators. Varieties of Democracy (V‑Dem)They observe significant declines in judicial independence, electoral integrity, and press freedom following the rise of populists. The difference from the counterfactual ranges from 5 to 15 percentage points after a decade—a magnitude comparable to the institutional gap between countries like Norway and Colombia. Although only 8 of the 51 cases evolved into fully authoritarian regimes, most show relevant democratic deterioration, with formal institutions preserved but weakened.

Overall, the study concludes that populist leaders leave lasting and negative economic and institutional effects. Poor economic performance—reflected in substantial declines in real GDP—combined with institutional erosion helps explain why these governments do not quickly "self-destruct," even in the face of weak economic outcomes. The authors highlight the need for further research into the conditions that favor the rise of populists, the mechanisms that sustain their hold on power, and the specific policies they adopt.

6. Lessons in Public Policy

Based on the findings of Funke, Schularick, and Trebesch, important lessons emerge for citizens, policymakers, and international institutions. First, populist leaders do not fulfill their promise to improve the economic situation “of the people”: there is no significant reduction in inequality nor an increase in the share of labor income. On the contrary, after 15 years, real GDP per capita is about 10% lower than in a scenario without populism. Voters and institutions should therefore adopt skepticism towards anti-elitist promises that claim to generate broad material gains.

Secondly, populism leads to economic disintegration and unsustainable macroeconomic policies. Populist governments reduce trade and financial integration, raise tariffs, and decrease economic openness. Public debt grows by up to 10 percentage points in 15 years, and inflation tends to increase. This implies greater sovereign risk, requiring countries, international financial institutions, and rating agencies to incorporate populist leadership as a factor of economic vulnerability.

Third, the study documents consistent erosion of democratic institutions. Judicial independence, electoral integrity, and press freedom decline significantly, by magnitudes comparable to the difference between consolidated and fragile democracies. While few cases evolve into full-blown authoritarianism, most weaken checks and balances and restrict opposition. Thus, democratic safeguards—a free press, an autonomous judiciary, electoral oversight, and robust constitutional norms—must be strengthened, and international organizations need to monitor and respond to institutional setbacks.

Finally, populists remain in power longer—on average, eight years, compared to four years for non-populist leaders—because they alter institutional rules that prolong their stay, even in the face of weak economic performance. This means that the democratic opposition, civil society, and international observers cannot rely solely on poor economic performance to limit populist governments. Continued investments in democratic resilience—civic education, independent media, the rule of law, and transparent elections—are essential to mitigate long-term damage to the economy and institutions.

References

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Dornbusch, Rudiger, and Sebastian Edwards. 1991. “The Macroeconomics of Populism in Latin America.” In The Macroeconomics of Populism in Latin America, edited by Rudiger Dornbusch and Sebastian Edwards, 7–13. Chicago, IL: University of Chicago Press.

Funke, Manuel, Moritz Schularick, and Christoph Trebesch. 2016. “Going to Extremes: Politics after Financial Crises, 1870-2014.” European Economic Review 88: 227–60.

Guriev, Sergei, and Elias Papaioannou. 2020. “The Political Economy of Populism.” CEPR Discus sion Paper DP14433.

Hawkins, Kirk A., Rosario Aguilar, Bruno Castanho Silva, Erin K. Jenne, Bojana Kocijan, and Cris tóbal Rovira Kaltwasser. 2019. “Measuring Populist Discourse: The Global Populism Database.” Paper presented at the 2019 EPSA Annual Conference in Belfast, UK, June 20–22

Jordà, Òscar. 2005. “Estimation and Inference of Impulse Responses by Local Projections.” American Economic Review 95 (1): 161–82

Jones, Benjamin F., and Benjamin A. Olken. 2005. “Do Leaders Matter? National Leadership and Growth since World War II.” Quarterly Journal of Economics 120 (3): 835–64.

Guiso, Luigi, Helios Herrera, Massimo Morelli, and Tommaso Sonno. 2018. “Populism: Demand and Supply.” CEPR Discussion Paper DP11871.

Rodrik, Dani. 2018. “Populism and the Economics of Globalization.” Journal of International Business Policy 1 (1-2): 12–33