How the rise of populism is impacting your business

A populist wave is washing over the world economy, further adding to the uncertainty already surrounding the global outlook.

A populist wave is washing over the world economy, further adding to the uncertainty already surrounding the global outlook.

Although populism is not easy to define and is sometimes found mainly in the eye of the beholder, the political science literature offers a useful definition. It describes populism as a political strategy that emphasises conflict between “the people” and “the elites”.

Right-wing variants tend to frame this conflict in cultural terms while left-wing ones usually focus on economic factors. Using this definition, economists from the Kiel Institute for the World Economy have built a cross-country database comprising 60 countries accounting for more than 95 per cent of global GDP and covering 120 years of data. They find that populism of all varieties has surged in recent years, reaching an historic peak in 2018 with more than a quarter of the sample under populist leaders. Europe and Latin America  have proved particularly susceptible, the former typically associated with right-wing and the latter with left-wing populists.

The Kiel Institute data highlights two other features. Populism has arrived in two large waves. An earlier wave peaked during the 1930s Great Depression while the most recent gathered force during the 2010s. And populism tends to be serial in nature. Once a populist government has ruled a country, this becomes a strong predictor of future periods of populist rule.

Granted, there are different approaches to defining populism and alternative ways of tracking its rise. Still, most studies tend to deliver a consistent message. That over the course of the 21st century, the attraction of populist parties to voters has risen markedly, with this shift concentrated in advanced economies.

Reasons why

There are many potential explanations for the current populist wave. Economist Dani Rodrik emphasises the politically contentious impact of globalisation on the distribution of income, wealth and employment. But he also reckons that other, sometimes related forces, including changes in technology, the rise of winner-take-all markets, the erosion of labour market protections and the decline of norms restricting pay differentials are all important.

Likewise, a comprehensive 2022 survey by Sergei Guriev and Elias Papaioannou not only highlights the role of secular economic drivers including the consequences of trade globalisation — especially the adjustment strains created by the “China shock” — and automation for rich country labour markets, but again considers a range of further explanations. These include:

• The destabilising impact of economic shocks including the GFC and Eurozone crisis
• The subsequent pursuit of fiscal austerity
• The effects of immigration and refugee flows
• The role of the internet and social media
• The influence of cultural factors including identity, political distrust and nationalism.

As the populist wave has swollen, so have potential economic downsides. According to the Kiel Institute, historically, populist governments have been associated with a substantial growth penalty over the medium term — equivalent to a loss of more than 10 percentage points of GDP after 15 years. Guriev and Papaioannou agree populism has been associated with significant economic costs, for example the Latin American experience characterised by repeated economic crises, currency devaluations and (hyper)inflation. The more recent vintage of populists may have done relatively better, but here too, early estimates of potentially substantial costs are appearing.

Global impact

This negative economic impact has three likely causes. Economic nationalism tends to encourage more trade protectionism and greater barriers to foreign investment, worsening resource allocation and undermining potential growth. An often cavalier approach to macro policy delivers elevated government debt burdens and higher inflation. And a willingness to disregard or dismantle existing institutions can undermine economic guardrails, destabilise expectations and distort incentives.

Moreover, populists do not always have to be in government to exert an adverse influence. Rising voter support for populist policies can encourage establishment parties to bend before the prevailing political winds, perhaps by adopting populist-tinged solutions or just by avoiding politically unpopular choices.

The result is that the populist wave is now influencing the international environment in at least three important ways. Most obviously, cross-border flows are facing increasing obstacles in the form of more trade protectionism, government intervention and barriers to foreign investment, as well as a political backlash to migrant and refugee movements.

Second, with many rich country governments already struggling under a heavy public debt burden, fiscal risks are mounting as they find themselves caught between significant financing needs and nervous bond markets on one side, and angry voters and burgeoning populist parties on the other.

Third, current conditions are contributing to a rising threat of future “fiscal dominance” whereby monetary policy becomes effectively subordinate to fiscal policy and central banks are unable to increase interest rates to control inflation. Large debts and sluggish growth rates are a key driver, mechanically squeezing the policy space available for higher rates that will not compromise budgetary sustainability. Populists’ willingness to challenge the institution of central bank independence is aggravating the situation.

While Australia remains exposed to the international economic consequences of populism, our political settings, including our compulsory preferential voting system, plus a manageable public debt burden, have afforded us a degree of domestic immunity. But there are warning signs cautioning against undue complacency. For example, voter discontent with the status quo is visible in a trend decline in the share of the vote directed to the major parties. A mix of lacklustre growth rates, population ageing, rising spending demands and a creaking tax system point to potential future system-stressors.

This article first appeared under the headline 'The people’s choice?' in the October 2025 issue of Company Director magazine.