Investigating Populism Anxious in Davos

Politicians and economists gathered in Davos are concerned about populism but they disagree on what causes it and how to respond.
Searching for solutions, the elites gathering in Davos were nonetheless unsure how to handle the new threat.

For International Monetary Fund chief Christine Lagarde, it's a late vindication. Three years ago, at the World Economic Forum, she warned that growing inequality worldwide would have serious economic and political consequences.

Few paid much attention, she said on Wednesday. Instead, "many economists harshly attacked me for that, including some at the IMF itself."

This year in Davos, unequal distribution of wealth is the subject of heated debate in the forum's hallways and conference rooms. Now most people see the inequality Ms. Lagarde called "excessive" as one reason for rapidly growing populism.

In discussion groups with titles like "Squeezed out and angry: How the crisis of the middle class can be solved," politicians, managers and economists are trying to identify the causes that led to the Brexit vote in Great Britain and brought Donald Trump to power in the United States.

But participants can't agree on the causes of populism or on how best to respond.

"Portraying this as purely a problem of inequality is not the whole truth," said economist Larry Summers. "The Americans have just elected the ultimate symbol of conspicuous consumption as their next president. A lot of people who voted for Trump and the Brexit believe that too much was done to help the poor."

The global elites gathered in the Swiss mountains feels powerless and ill-prepared to respond to the rise of demagogues from outside the political mainstream. The trend is set to continue in 2017 as populists challenge governments this year in places like the Netherlands, where right-wing populist politician Geert Wilders may win in March. There will also be runoff elections for the French presidency in May, when nationalist politician Marine Le Pen could come into power, though polls do not predict this so far. And in September, Germany could see the far-right Alternative for Germany (AfD) party enter the Bundestag. Managers at Davos spoke openly about their concerns.

"Populism scares me," said hedge fund manager and billionaire Ray Dalio. His anxiety is understandable given that popular rage is directed against political and economic elites like him and others gathered in Davos.

"Many people believe that the political elite has failed completely," said Eric Cantor, former majority leader in the U.S. House of Representatives and now an investment banker with Moelis & Company. "There is no longer any confidence in the people who are gathered here in Davos. Instead, people seek strong leaders who can also preserve their identity. The free market formula simply isn't working for everyone."

Joe Biden, the outgoing U.S. vice president, attributed political upheaval to middle class angst about the future. "People have legitimate fears. Many no longer feel that their lives and the lives of their children will improve. The middle class is being hollowed out and social stability is in jeopardy. And the top 1 percent of the income spiral is no longer carrying the load it could carry."

Mr. Summers disagreed, arguing, "There is, most of all, a desire for greater national strength and unity." He said this is a much more powerful cause than the fear of decline.

The truth is likely somewhere in between. According to Alexander de Croo, the Belgian deputy prime minister, many people wonder whether societies are even making progress anymore. "The populists use two tools: fear and identity. This is a toxic combination, because it divides the world into good and bad, and the others are always the bad ones."

Many of the senior figures were vague about how to counter populists' simplistic promises. Ms. Lagarde repeated her call for structural reforms and higher government investments in concrete projects at regional levels.

Mr. Cantor and others said that the primary goal should be addressing the influx of refugees. And on Tuesday, Chinese President Xi Jinping argued that more growth driven by innovation is key to fighting growing inequality. However, none could resolve the contradiction that digitalization is likely to destroy vast numbers of jobs in the coming decades, especially in the West.

For Mr. Summers, the bitter irony is that Mr. Trump and other populists, with their ad-hoc political decisions, will harm precisely the people who voted for them: the lower and middle classes. He cited the example of Mr. Trump's Twitter diplomacy, which persuaded companies such as Ford to create thousands of jobs in the U.S. instead of Mexico. But Mr. Trump's tough position has caused the Mexican peso to lose so much of its value that the country is now more competitive again. "That will cost tens of thousands, if not hundreds of thousands of jobs in the United States," Mr. Summers said.

For Turkish writer Elif Shafak, this shows that the new powers are not truly challenging the establishment. "The populists are just a new elite with a different ideology," she said.


Torsten Riecke is Handelsblatt's international correspondent. Daniel Schäfer leads Handelsblatt's financial coverage from Frankfurt. To contact the authors: [email protected], [email protected]