DP13107 Inequality Aversion, Populism, and the Backlash Against Globalization

Author(s): Luboš Pástor, Pietro Veronesi
Publication Date: August 2018
Keyword(s): Brexit, Globalization, inequality, populism, risk aversion, Trump
JEL(s): D72, F65, G11, G12, G18, P16
Programme Areas: Public Economics, Financial Economics, International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13107

Motivated by the recent rise of populism in western democracies, we develop a model in which a populist backlash emerges endogenously in a growing economy. In the model, voters dislike inequality, especially the high consumption of the ``elites." Economic growth exacerbates inequality due to heterogeneity in risk aversion. In response to rising inequality, rich-country voters optimally elect a populist promising to end globalization. Redistribution is of limited value in containing the backlash against globalization. Countries with more inequality, higher financial development, and current account deficits are more vulnerable to populism, both in the model and in the data. Evidence on who voted for Brexit and Trump in 2016 also largely supports the model.