The Political Economy of Populism: How Economic Insecurity Reshapes Democratic Incentives

theconvergencys
Nov 20, 2025
4 min read

By Ayaka Tanaka Nov. 6, 2024

I – Introduction

Populism has moved from fringe rhetoric to mainstream governance. Between 2010 and 2024, the share of the global population living under populist or nationalist leadership rose from 12 percent to 43 percent, according to the V-Dem Institute (2025). While political scientists often frame this as a cultural backlash, its roots are fundamentally economic: stagnant real wages, fiscal austerity, and widening wealth inequality.

This paper argues that populism is not merely a political reaction but a rational—if destabilizing—response to the failures of neoliberal economic management. By examining how economic insecurity alters voter behavior, institutional trust, and fiscal policy, we can understand why populism thrives even in prosperous democracies.

II – Economic Insecurity and Voter Behavior

The structural inequality driving populist sentiment predates recent crises. Since 1990, labor’s share of global income has fallen by over 6 percentage points, while the top 1 percent captured nearly one-quarter of all income growth (IMF Fiscal Monitor 2024). These material disparities erode the social contract that underpins democratic legitimacy.

Economic anxiety acts as a gateway emotion to political radicalization. When citizens experience persistent insecurity—temporary contracts, gig employment, or unaffordable housing—they shift from evaluating policies on efficiency to judging them on identity and protection. A London School of Economics (2024) study found that a 1 percent decline in local manufacturing employment corresponded to a 4 percent rise in votes for anti-establishment parties across 15 European democracies.

In developing economies, the dynamic is similar but mediated through price instability rather than unemployment. World Bank inflation data (2025) show that in countries where food prices rose more than 15 percent annually between 2021 and 2023, populist approval ratings increased by an average of 9 percentage points. Economic shocks, not ideology alone, generate the conditions for populist mobilization.

III – Fiscal Policy Under Populism

Once in power, populist governments rewrite fiscal priorities. They typically expand social transfers and public-sector wages while curbing independent oversight—policies that deliver short-term popularity at long-term cost. Argentina’s 2023 budget, for instance, raised fuel and food subsidies by 47 percent, producing a 10 percent fiscal deficit and 140 percent inflation. Hungary’s 2024 “Utility-Price Protection Program” increased household subsidies despite EU warnings, widening the deficit to 6.8 percent of GDP.

Yet populist fiscal activism is not pure mismanagement. It reflects genuine demand for redistribution neglected by austerity-driven orthodoxies. OECD Economic Outlook (2025) reports that in post-austerity Europe, each €1 increase in social spending produced a 1.4-point rise in trust in government among lower-income citizens. The challenge lies in designing redistribution that is institutionally disciplined rather than electorally impulsive.

Populist regimes often finance expanded spending through debt issuance rather than structural reform. As Moody’s Sovereign Risk Review (2025) notes, nations under populist leadership experienced, on average, a 23 percent increase in borrowing costs within two years of assuming power, reflecting investor concern over rule-of-law erosion and unpredictable taxation.

IV – Institutional Erosion and Market Reaction

Markets initially reward populist stimulus: domestic demand surges, unemployment falls, and consumption expands. But confidence erodes when central-bank independence or judicial oversight weakens. Brazil’s 2015-2018 experience under interventionist fiscal populism illustrates this cycle. After early GDP growth of 3.2 percent, inflation climbed to 10 percent, investment fell 25 percent, and capital flight reached $41 billion (Banco Central do Brasil Annual Report 2020).

Financial volatility feeds political polarization. Populists blame external elites—international investors, the IMF, or “globalists”—for economic setbacks, reinforcing nationalist narratives. This recursive loop of grievance sustains populist legitimacy even amid economic decline.

At a global level, populist governance has contributed to the highest average sovereign-risk premium since 2009 (Bank for International Settlements 2025). Multinational firms now integrate “political-risk pricing” into supply-chain and investment models, effectively monetizing democratic instability.

V – Reconstructing Economic Trust

Reversing populism requires rebuilding the economic foundations of trust. Three policy interventions stand out:

Inclusive Industrial Strategy – Governments must pair technological innovation with employment guarantees. South Korea’s “Digital Transition Fund 2025” ties AI automation grants to worker retraining quotas, offsetting job losses while maintaining productivity.
Progressive but Predictable Taxation – A unified global minimum tax, as endorsed by the OECD’s Pillar Two Framework, can prevent multinational profit-shifting that fuels inequality. Predictability reduces the populist appeal of punitive windfall taxes.
Participatory Budgeting – Involving citizens directly in spending decisions increases perceived fairness. UNDP Governance Evaluation 2024 found municipalities with participatory budgeting reported 18 percent higher satisfaction with local services, regardless of ideology.

Such measures shift the political calculus: when voters see tangible, transparent benefits, populist promises of quick fixes lose traction.

VI – Conclusion

Populism thrives on economic disillusionment. Its endurance is not a symptom of irrationality but a reflection of rational frustration with systems that privilege markets over livelihoods. The economic reforms of the late 20th century maximized efficiency while minimizing solidarity; populism is the bill now coming due.

Democracies cannot fight populism by moral condemnation alone. They must compete materially—delivering security, fairness, and opportunity with the same urgency populists deliver rhetoric. Only when fiscal policy and political legitimacy are once again aligned can markets and democracies reinforce, rather than undermine, each other.

Works Cited (MLA)

V-Dem Institute Democracy Report 2025. University of Gothenburg, 2025.
IMF Fiscal Monitor 2024. International Monetary Fund, 2024.
World Bank Global Inflation Database 2025. World Bank, 2025.
OECD Economic Outlook 2025. Organisation for Economic Co-operation and Development, 2025.
Moody’s Sovereign Risk Review 2025. Moody’s Analytics, 2025.
Bank for International Settlements Quarterly Review 2025. BIS, 2025.
London School of Economics Centre for Economic Performance Working Paper 2024. LSE, 2024.
UNDP Governance Evaluation 2024. United Nations Development Programme, 2024.