It is nearly 30 years since Rudiger Dornbusch and Sebastian Edwards published a seminal book, The Macroeconomics of Populism. Their conclusion back then was that the economic policies of populist leaders were quintessentially irresponsible. These governments, blinded by an aim to address perceived social injustices, specialised in profligacy, unbothered by budget constraints or whether they might run out of foreign exchange.

Because of this disregard for basic economic logic, their policy experiments inevitably ended badly, with some combination of inflation, capital flight, recession and default. Salvador Allende’s Chile in the 1970s, or Alan García’s Peru in the 1980s, capture this story perfectly.

These days, the macroeconomics of populism looks different. Of course there are populist leaders out there whose policies follow, more or less, the playbook of the 1970s and 1980s. Donald Trump may prove to be one of those, with a late-cycle fiscal expansion that seemed to have no basis in economic reasoning; Recep Tayyip Erdogan, by some accounts, may be another.

But a much more interesting phenomenon is the apparent surge in populist leaders whose economic policies are remarkably disciplined.

Take Mexico’s president, Andrés Manuel López Obrador. When it comes to fiscal policy, it is odd indeed that this fiery critic of neoliberalism seems fully committed to austerity. His budget for 2019 targets a surplus before interest payments of 1 per cent of GDP, and on current plans he intends to increase that surplus next year to 1.3 per cent of GDP. He has upheld the autonomy of the central bank and, so far at least, his overall macroeconomic framework is anything but revolutionary.

Hungary’s prime minister Viktor Orban offers another example of conservative populism. Under his watch, budget deficits have been considerably lower than they had been previously, helping to push the stock of public debt down from 74 per cent of GDP in 2010, the year Orban took over, to 68 per cent last year.

This emphasis on the virtues of fiscal prudence is also visible in Poland, where Jaroslaw Kaczynski’s PiS has managed public finances with sufficient discipline in the past few years to push the debt/GDP ratio below 50 per cent last year, the first time this has happened since 2009.

The obvious question is: what has changed in the decades since Dornbusch and Edwards went into print?

One answer is that today’s populists tend to strive for national self-reliance, which encourages them to avoid building up any dependence on foreign capital. And since that goal is achieved by keeping a tight rein on macro policy, fiscal indiscipline is avoided in order to limit vulnerability to foreign influences.

Perhaps this is because the 'them', or the perceived enemy, for many of today’s populists tends to be outside the country rather than inside. Broadly speaking, it is the forces of globalisation — and global capital in particular — that are the problem for these leaders, and self-reliance is the only way to keep those forces at arm’s length. This helps to explain why, for example, Orban has been so keen to repay debt to Hungary’s external creditors. He has relied instead on selling bonds to Hungarian households to finance his deficits, even though the interest rates on those bonds are much higher than he would pay to foreign creditors. It also helps explain why the PiS in Poland has presided over a decline in foreign holdings of its domestic bonds. Foreign investors owned 40 per cent of Poland’s domestic government debt back in 2015, but only 26 per cent now.

In other words, among many of today’s populists there is a blurring of the distinction between populism and nationalism. And the nationalistic urge to keep the rest of the world off your back seems to dominate the populist urge to spend money. The perfect example of that instinct is Vladimir Putin: not necessarily a populist, but his administration has been emphatic about the need to keep public spending low and to build solid financial buffers. National self-reliance is an economic obsession for the Russian government, and provides a model for other countries who wish to insulate themselves from international finance.

One of the reasons why the macroeconomics of populism have changed in this way is the historical legacy of economic disaster. If you are a populist leader in a country where financial crisis is part of living memory — as it is in Mexico, Hungary and Russia, say — you might do well to err on the side of conservatism for fear of repeating the mistakes of your predecessors.

But another reason why populism looks different for countries like Poland, Hungary, Mexico and Russia has to do with mere luck. Hungary and Poland, in particular, enjoy the luck of geography: having been absorbed into the EU, they have received financial transfers from Brussels averaging some 3-4 per cent of GDP in the past few years, so that populism in these countries has been solidly underpinned by the terms of their EU membership. López Obrador is enjoying the inheritance of his predecessor’s sound macro policy, together with a buoyant US economy and low US interest rates. Russia has had the good fortune of oil exports to rely on.

The thing about luck is that it can run out. So maybe it’s not quite time yet to bury the old macroeconomics of populism. But for the time being, it seems true to say that many of today’s populists have an unexpectedly robust sense of economic discipline.

This article was originally published in the Financial Times.

Summary

• Multilateralism may, in theory, put countries on an equal economic footing. But in practice the concept has often relied on an anchor government to create and preserve global norms. Under the presidency of Donald Trump, the US has accelerated its move away from leadership in global economic governance. This shift threatens the monetary and trading systems that have long underpinned globalization. Does the global economy need – and can it find – another leader to take America’s place?
• In the monetary sphere, the US role in providing an internationalized currency has endured relatively well, even though the US’s formal anchoring of the global exchange rate system collapsed nearly half a century ago. Governance of the US dollar and of the dollar-based financial system has largely been left to competent technocrats.
• Recent US political uncertainty has encouraged other governments, particularly in the eurozone and China, in their long-standing quest to supplant the dollar. But these economies’ internal weaknesses have prevented their respective currencies from playing a wider role. Arguments for a multipolar system exist, yet network effects plus the dollar’s superior institutions mean it has retained its dominance.
• In trade, the US role as anchor of the global legal order was already looking unreliable before Trump’s election. Washington has faced growing resistance at home to its global responsibilities. This, together with the idiosyncratic rise of countries such as China, has made the US an increasingly unreliable and narrowly transactional leader.
• More recently, hard-to-regulate issues such as foreign direct investment, technology transfer and data flows, often with national security implications, are increasingly undermining the ideal of multilateral global governance. Institutions such as the World Trade Organization, focused on cross-border trade in goods and services, are becoming less relevant.
• Recent US actions against the Chinese technology firm Huawei show the Trump administration’s willingness to decouple the US market from China and try to drag other economies with it. As far as possible, other governments should resist taking sides. A complete separation of the global economy into rival spheres is probably unfeasible, and certainly highly undesirable.
• Although future US administrations may be less wantonly destructive, it is not realistic to expect them to resume America’s former role. Nor can the US simply be replaced with another power. Instead, coalitions of governments with interests in international rules-based orders will need to form. These coalitions will need to show due deference to issues like investment and national security, especially where attempts to bind governments by multilateral rules are likely to provoke a severe backlash from domestic constituencies.

Epidemics, of the size of Covid-19, have huge economic impacts – not just from the costs of managing the health of people, but stopping them, and keeping the economy working. The 10% fall in global stock markets since it became clear that Covid-19 would not be limited to China has boldly highlighted this.

Suppressing the epidemic, but allowing the economy to still function, requires key decisions, in which central banks and finance ministries play a part.

The role of fiscal and monetary authorities in managing an epidemic economy

The scope to use monetary policy to manage the economic impact of Covid-19 is limited. The fact that the underlying cause of the shock is an infectious disease outbreak (rather than a banking crisis, as in 2008-09) and nominal interest rates are currently close to zero in most major advanced economies reduces the effectiveness of monetary policy.

Since 2010, reductions in fiscal deficits mean there is more scope for supportive fiscal action. But even here, high public debt levels and the desire not to underwrite ‘zombie’ companies that may have been sustained by a decade of ultra-low interest rates remain constraints. 

However, outside broad based fiscal and monetary policies there are six ways in which finance ministries and central banks will play a critical role in responding to the crisis.

A first crucial role for finance ministries and central banks is in helping provide the best possible economic evaluation of strict containment measures (trying to isolate each potential case) versus managing the epidemic (delaying the spread of the virus, protecting the most vulnerable and treating the sick, while enabling the majority of people to get on with daily life). Given the economic consequences, they must play a full part, alongside health experts, in advising political leaders on this key decision.

Second, if large numbers of staff are required to work from home to manage the epidemic, they have the lead role in doing whatever is necessary to ensure that financial markets – and thus the wider economy – will continue to function smoothly.

Third, they need to ensure adequate funding for the public health response. Steps that can make an enormous difference to the success of containment strategies, such as strengthening surveillance, and guaranteeing the availability of testing kits and protective equipment for front line health workers, must not fail because of a lack of funding. 

Fourth, they have a lead role in designing targeted economic interventions for the wider economy. Some of these are needed immediately to re-enforce and incentivize strict containment strategies, such as ensuring that employees without full or adequate sick leave cover have the financial support to enable them to report and self-isolate when they get sick. 

Other interventions may help improve the resilience of the economy in accommodating moderate ‘social distancing’ measures; for example, by providing assistance to small firms to help them gear up for home working.

Yet others are needed, as a contingency, to safeguard the most vulnerable sectors (such as tourism, retail and transport) in circumstances where there is a prolonged downturn. The latter may include schemes to allow deferral of tax payments by SMEs, or steps to encourage loan extensions and other forms of liquidity support from the banking system, or by moves to underwrite continued provision of business insurance.

Fifth, national economic authorities will need to play their part in combatting ‘fake news’ through providing transparent and high-quality analysis. This includes providing forecasts on the likely economic impact of the virus under different scenarios, but also detailed information on the support and contingency measures they are considering, so they can be improved and refined through feedback. 

Sixth, they will need to ensure that there is generous international support for poor countries, by ensuring the available multilateral support facilities from the international financial institutions and multilateral development banks are adequately funded and fit for purpose. The World Bank has already announced an initial $12 billion financing package, but much more is likely to be needed.

They also need to support coordinated bilateral aid where this is more effective, as well as special measures to support particularly vulnerable groups, for example, in refugee camps and prisons. Given the importance of distributing sophisticated medical equipment and expertise quickly, it is also important that every effort is made to avoid delays due to customs and migration checks.

Managing the future

The response to the immediate crisis will rightly take priority now, but economic authorities must also play their part in ensuring the world finally takes decisive steps to prevent a repeat of Covid-19 in future.

The experience with SARS, H1N1 and Ebola shows that, while some progress is made after each outbreak, this is often not sustained. This epidemic shows that managing diseases is absolutely critical to the long-term health of global economy, and doubly so in circumstances where traditional central bank and finance ministry tools for dealing with major global economic shocks are limited.

Finance ministries and central banks therefore need to push hard within government to ensure sustained long-term funding of research on prevention and strengthening of public health systems. They also need to ensure that the right lessons are drawn by the private sector on making international supply chains more robust.

Critical to the overall success of the economic effort will be effective international coordination. The G20 was established as the premier economic forum for international economic cooperation in 2010, and global health issues have been a substantive part of the G20 agenda since the 2017 Hamburg Summit. At the same time, G7 finance ministers and deputies remain one of the most effective bodies for managing economic crises on a day-to-day basis and should continue this within the framework provided by the G20.

However, to be effective, the US, as current president of the G7, will need to put aside its reservations on multilateral economic cooperation and working with China to provide strong leadership.

With the IMF forecasting a 6.1% fall in advanced economy GDP in 2020 and world trade expected to contract by 11%, there is intense focus on the question of how and when to re-open economies currently in lockdown.

But no ‘opening up’ plan has a chance of succeeding unless it commands the confidence of all the main actors in the economy – employees, consumers, firms, investors and local authorities.

Without public confidence, these groups may follow official guidance only sporadically; consumers will preserve cash rather than spend it on goods and services; employees will delay returning to work wherever possible; businesses will face worsening bottlenecks as some parts of the economy open up while key suppliers remain closed; and firms will continue to delay many discretionary investment and hiring decisions.

Achieving public confidence

Taken together, these behaviours would substantially reduce the chances of a strong economic bounce-back even in the absence of a widespread second wave of infections. Five key steps are needed to achieve a high degree of public confidence in any reopening plan.

First, enough progress must be made in suppressing the virus and in building public health capacity so the public can be confident any new outbreak will be contained without reverting to another full-scale lockdown. Moreover, the general public needs to feel that the treatment capacity of the health system is at a level where the risk to life if someone does fall ill with the virus is at an acceptably low level.

Achieving this requires the government to demonstrate the necessary capabilities - testing, contact tracing, quarantine facilities, supplies of face masks and other forms of PPE (personal protective equipment) - are actually in place and can be sustained, rather than relying on future commitments. It also needs to be clear on the role to be played going forward by handwashing and other personal hygiene measures.

Second, the authorities need to set out clear priorities on which parts of the economy are to open first and why. This needs to take account of both supply side and demand side factors, such as the importance of a particular sector to delivering essential supplies, a sector’s ability to put in place effective protocols to protect its employees and customers, and its importance to the functioning of other parts of the economy. There is little point in opening a car assembly plant unless its SME suppliers are able to deliver the required parts.

Detailed planning of the phasing of specific relaxation measures is essential, as is close cooperation between business and the authorities. The government also needs to establish a centralised coordination function capable of dealing quickly with any unexpected supply chain glitches. And it must pay close attention to feedback from health experts on how the process of re-opening the economy sector-by-sector is affecting the rate of infection.  

Third, the government needs to state how the current financial and economic support measures for the economy will evolve as the re-opening process continues. It is critical to avoid removing support measures too soon, and some key measures may have to continue to operate even as firms restart their operations. It is important to show how - over time - the measures will evolve from a ‘life support’ system for businesses and individuals into a more conventional economic stimulus.

This transition strategy could initially be signalled through broad principles, but the government needs to follow through quickly by detailing specific measures. The transition strategy must target sectors where most damage has been done, including the SME sector in general and specific areas such as transport, leisure and retail. It needs to factor in the hard truth that some businesses will be no longer be viable after the crisis and set out how the government is going to support employees and entrepreneurs who suffer as a result.

The government must also explain how it intends to learn the lessons and capture the upsides from the crisis by building a more resilient economy over the longer term. Most importantly, it has to demonstrate continued commitment to tackling climate change – which is at least as big a threat to mankind’s future as pandemics.

Fourth, the authorities should explain how they plan to manage controls on movement of people across borders to minimise the risk of new infection outbreaks, but also to help sustain the opening-up measures. This needs to take account of the fact that different countries are at different stages in the progress of the pandemic and may have different strategies and trade-offs on the risks they are willing to take as they open up.

As a minimum, an effective border plan requires close cooperation with near neighbours as these are likely to be the most important economic counterparts for many countries. But ideally each country’s plan should be part of a wider global opening-up strategy coordinated by the G20. In the absence of a reliable antibody test, border control measures will have to rely on a combination of imperfect testing, quarantine, and new, shared data requirements for incoming and departing passengers.  

Fifth, the authorities must communicate the steps effectively to the public, in a manner that shows not only that this is a well thought-through plan, but also does not hide the extent of the uncertainties, or the likelihood that rapid modifications may be needed as the plan is implemented. In designing the communications, the authorities should develop specific measures to enable the public to track progress.

Such measures are vital to sustaining business, consumer and employee confidence. While some smaller advanced economies appear close to completing these steps, for many others there is still a long way to go. Waiting until they are achieved means higher economic costs in the short-term. But, in the long-term, they will deliver real net benefits.

Authorities are more likely to sustain these measures because key economic actors will actually follow the guidance given. Also, by instilling confidence, the plan will bring forward the consumer and business decision-making crucial to a strong recovery. In contrast, moving ahead without proper preparation risks turning an already severe economic recession into something much worse.