Populism and the Welfare State: Why Some Latin American Countries Produce Cycles Instead of Stability

Abstract

Populist politics and demand for nationalization are a recurrent phenomenon in many Latin American countries. Compared to the ‘European’ (welfare) state with its moderate tax-based redistribution, many Latin American countries have cycled between right-wing governments pursuing radical privatization and left-wing governments pursuing nationalization of many sectors. Why do we see these cycles with seemingly little middle ground? This paper argues that the root of this phenomenon lies in a political conflict between the Left and the Right in the absence of a credible commitment device: The Left can only develop welfare-state policies of redistribution with a minimum degree of state capacity such as an effective tax administration; the Right would only help establishing such an administration if they do not fear radical redistribution. With trust lacking between both sides, many Latin American countries end up in a political impasse where the Right shifts to a neoliberal, small state, whereas the Left shifts to a populist nationalization state. To bolster this argument, I construct a simple model of (in-)complete information with two ideal-type political parties. Its key result is that if the (moderate) Right is unsure about the Left’s motives it will deviate from its first preference, a strong state. As a consequence, the (moderate) Left also deviates from its preferred tax-based redistribution and the state ends up in an antagonistic equilibrium: the privatization vs. nationalization cycle. Anecdotal historical evidence shows some examples of Latin American countries that became trapped in such an antagonistic constellation which led to cycles instead of stability.