A dialogue between a populist and an economist

4 IMF economists have this interesting way of presenting research. The research is on trying to understand the rise of populism in the world. One could just go about preparing a research paper with detailed lit review, research 0bjective, research gap, methodology, empirical estimation, result explanation and then conclusion.

But instead the econs choose to explain their research via a dialogue between a populist politician and economist:

Populist: Hello, I am very happy because populist vote is on the rise everywhere. Finally, we are winning! Unfortunately, you economists have not understood us. Recently you started writing a lot of papers but you are not really getting to the core of the issue. Youare focusing exclusively on economics.

Economist: Wait a moment! The economy can explain a lot. We have revised our understanding of political economy. A few years ago, we just focused on the aggregate economy. Parties in power won the elections if the economy was doing well. Therefore, politicians had the incentives to have expansionary fiscal and monetary policy. 

Shortsighted or misinformed voters voted for parties promising easy policies. This simple idea was called the political economy cycle and explained well what was happening.

Populist: Fine. But now this is not true for the current situation. Look at the map of Europe. Poland was the country which suffered less economic crises in the last 10 years in Europe and populists are in power. On the contrary, Ireland and Portugal suffered a deep crisis and they have no populist party. Switzerland with an enviable economic situation and very low unemployment has one of the strongest populist partiesin Europe. How do you explain this?
[Insert Figure 1 Here]

Economist: Do not worry. Economists have solutions for every puzzle. In this case, we use what I would call the “factor-proportion model of populism.” 

Populist: What is this?

Economist: Simple! In a nutshell, the old Heckscher-Ohlin framework tells us that factor prices change after liberalization, creating some “losers”, such as owners of factors whose price goes down, and some “winners.” The “losers” of liberalization are typically the lowskilled workers exposed to foreign competition
or the workers who lose the job because of technological progress. They tend to vote for you. Isn’t this so simple? The explanation was already in a model written almost 90 years ago!….We can update the 1992 US election saying by Clinton “it’s the economy, stupid!” to “it’s factor proportion, stupid!”

Nice bit. The whole thing is quite interesting…

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