Abstract

The central hypothesis of this paper is that high income inequality in Latin
America contributes to intense political pressures for macroeconomic policies to raise the
incomes of lower income groups, which in turn contributes to bad policy choices and weak
economic performance. The paper looks in detail at one common type of policy failure: the
populist policy cycle. This particular type of Latin American policymaking, characterized by
overly expansionary macroeconomic policies which lead to high inflation and severe balance
of payments crises, has been repeated so often, and with such common characteristics, that it
plainly reveals the linkages from social conflict to poor economic performance.

JEL Classification: P16; O21; O11; D72; E31.