Inequality, Populism, and Geopolitics

Has populism become a crucial new kind of political risk? Is there a danger of a geopolitical domino effect? And what role does the economy play? 

Populist politics looks to be on the rise everywhere in the world, and it is becoming a game changer. Whether it is in the U.S. (Trump and Sanders), Europe (Brexit, AfD, UKIP, FPO, SVP, DPP, FN, but also Melenchon, Podemos, Tsipras, Corbyn, etc.), Asia (Duterte in the Philippines, Abe in Japan, Xi Jinping in China, Modi in India), Africa (South Africa for example), and Latin America (Brazil, Venezuela, etc.).

Indeed, there is no doubt that we see a tectonic shift that can affect geopolitics as well as markets everywhere. Notwithstanding simplistic claims that it is Russia fueling populism, there is more to it than what the traditional parties and establishment media are claiming. 

The root of the problem is the rise of inequality within most countries of the world. And, this growing inequality is mostly the result of the “laws of man.” It is a result of how we have structured the market economy—of how we have restructured it in the last third of the twentieth century. Inequality has been a choice in our democracy made through the existing political system. But the political system has often exhibited a democratic deficit. What the democratic political system has done has resulted not only in more inequality, but in lower growth, more instability, and overall poorer economic performance (including extensive environmental destruction). 

This, in turn, has fueled widespread anger that has been brushed aside by the traditional parties and establishment media who were professing the need for a globalized world, and that anyone thinking otherwise was either a racist, a bigot, a conservative, a deplorable, or an uneducated person. As a result, it is the fringe parties who came out of the forest and responded to the populist call. And we now all know the outcome: Brexit, Donald Trump, European election results (France, Germany, Italy, Netherlands, etc.,).

And, today as we speak, the world is bracing itself for a trade war. Yet that is little more than a 'sideshow'. Donald Trump's announcement of levies on imported steel & aluminum and the recent election results in Italy (where more than 60% of the population chose a form of chaotic populism) are part of one and the same problem: the revolt against the post-war system. This revolt has been going on for several years now and is affecting most of the EU countries alongside the US (cf. on the right with Trump and on the left with Sanders). 

This popular dissatisfaction, for sure, is the result of the combination of two main factors. On the one hand, there is the widespread dissatisfaction geared against migrants - who are perceived as a threat to the local culture. Also, there is also a form of economic desperation. In the name of globalism, fueled by the financialization of the economy, large groups of people in developed countries see their wealth flowing into the hands of fewer people and are convinced that the latter have cornered the fruits of globalization. As long as politicians in the West won't tackle these two systemic problems, populist right and left wing waves will continue to expand further and eventually wipe out centrist parties.

The election of populist is not the root of the problem but the symptom of the problem. Had the severity of inequality not been so critical in the first place, and had the mainstream media and political parties not ridiculized the expressions of the people, the populist parties would never have had the chance to arise from the ashes. 

So, what exactly are we talking about? Is this about a populist getting elected in a major country in Europe (cf. in the U.S., it is already the case)? It’s tempting to submit the question that way, but in fact whether or not either of them becomes elected (and the likelihood is not slim), is almost irrelevant now: the damage has been done. Their politics and their potential voters have already influenced and thus shaped the debate and the existing political landscape. And they have done so in such ways that make decision-making and life very difficult for governments – and therefore very unpredictable for investors. And it’s about much more than Trump in the U.S. or Luigi Di Maio (Five Star Movement) or Matteo Salvini (Northern League) in Italy.

As a reminder, populism did not arise when Trump was elected, or the Brexit was voted on. No, actually, populism already took its roots in the realm of power years before, such as in Greece with Alexis Tsipras (i.e., a left-wing populist). And, what about Switzerland with the SVP (cf. Christoph Blocher Schweizerische Volkspartei (aka UDC), being the largest party in the Swiss Federal Assembly) or in Denmark with the DPP in power. But, populism goes much deeper than those populist parties in power in some countries; it’s also about a whole host of parties and movements whose fundamental characteristic is deep mistrust and anger of political elites.

Subsequently, the nature of the risk for investors and businesses is power vacuum and stalemate. People often think that populism is about mobilization and protest with ‘things kicking off.’ That’s in part true, but the real risk is the uncertainty that these forces create, and their impact on states and governments. What investors and markets should worry about is things grinding to a halt.

What all these populist movements in the US, but also in Europe, in Latin America, Asia, and Africa share is their deep resentment toward elites – of all kinds. What all of the research highlights is that this about a profound sense of betrayal on behalf of citizens, everywhere. A perception that their governments – of whatever political color – and the global financial establishment has sold them out; and, that both the political leaders and the business elite are in cahoots. These citizens and voters who choose to support populist movements and parties (cf. be they small or large, left or right wing, (dis)organized) do not trust their governments, and they trust the media and the banks even less; and these groups of citizens and voters are legion. In that respect, populism is the canary in the coal mine: it’s an early warning that a significant number of people are feeling betrayed and desperate, and sometimes with good reason.

And despite what the mainstream media and political establishment are claiming, populism is not specifically a right-wing phenomenon. And, actually, it’s a ‘double no’; in the sense that not only do you find such populist movements and parties on both sides of the spectrum (think Podemos in Spain, SYRIZA in Greece, Melenchon in France, the Five Star Movement in Italy, or the anti-corruption protests in Brazil). 

But, it’s also worth noting that they are getting the votes of electors from both sides of the traditional political spectrum (f. ex. Marine Le Pen in France has pretty much captured the regional bastions of the Left). Their argument is it does not matter whether your current leaders purport to be on the right or the left, in fact, they are all the same: "they are in it for themselves and do not care about you. So you should just come and join us because we are not involved in the petty right/left argument, we are here about you". And, this is one of the most challenging features of the trend – it breaks away with the traditional party lines we had come to understand, and leave the mainstream struggling to understand the new demand and preferences of the electorate.

And, while populism is on the rise globally, you have that one superpower that has become hesitant and in some cases even reluctant to play its role; I am taking here about the United States that has been causing a vacuum of power (cf. and it dates from before Trump - it started under Obama with his foreign policy articulated around "Leading from Behind"). And because of this power vacuum combined with regional powers which are becoming more vocal (China and Russia), we have a kind of perfect storm. 

In other words, there is a danger of a geopolitical domino effect. As the active powers who preserved and the ‘pax Americana’ stable become enmeshed in surviving their populist waves, they become fragilized. They behave like failed states or at least weak nations. These mainstream parties become embroiled in referenda, prey to hung parliaments, government dead-locks, decision-making stalemate, and legislative vacuums. They become less and less capable of managing crises (cf. Merkel’s unfolding fate is a case in point as well as the case of Juncker as Head of the EU Commission).

There is no question that this is an incentive for other actors to behave assertively. Think Russia. Think China. Think islamic terror. With now Italy flailing around in the heart of Europe, who’s going to stop them? The main consequence in geopolitical terms is that populist political leaders end up emboldening rogue actors who can detect an opportunity to act, to ‘get away with’ poor international behavior because of the low probability of retaliation. 

This means that catastrophic events (terrorist attacks, or belligerent behavior in military and trade terms for instance, or even the massive re-negotiation treaties Brexit or NAFTA-style) are a lot more probable due to the fundamental balance of power that has been upset. That’s what investors and markets need to worry about too, because, aside from the political and human toll, this is when markets and investors around the world react. 

So the question is now whether this is reversible. What if the global or regional economy suddenly improves? Those are two separate interrogations; let’s kickstart with the second one on the economy. Firstly, in the US, the economy has improved on a macro level, and it made no difference because of the rising inequality. Second, it’s really important to keep in the back of your mind that if you want to understand where all this popular anger is coming from, that what makes these voters (i.e., and in Europe and the US they are primarily drawn from the middle and lower-middle-income brackets) tick is not just a question of money and wealth.

There have been studies about people who are labelled the ‘Reluctant Radicals’ (i.e., those electorates which are not in any way extremists, or even particularly radical, but are attracted to populist movements and parties) and while wealth plays a part, research shows that it is about a lot more than that - much more. It is a question of status, a sense of hope for their kids which is not about becoming rich necessarily but about establishing a society where their efforts are rewarded and respected. What’s at stake is also the perception of losing their national identity an cultural heritage and becoming second-class citizens to migrants, who refuse to integrate, want to impose their traditional customs onto the 'natives', have not ‘contributed’ to society, and are ‘jumping the queue.’ Many of the voters who supported the Marine Le Pens of this world were not just concerned about their living standards; they were angry because they feel their interests and their views do not count anymore. This is often where the xenophobia and racism come in: they think they are losing out to migrants who are exploiting a system that’s cheating them, and, to add insult to injury, this system was created by an elite that is insulated from the consequences of its own choices. Economics does play a part, but it’s often more an issue of inequality, rather than absolute terms. So unless there are significant redistribution and job creation, an improving economy riddled with part-time or minimum wage contracts is not going to sway them at all.

Some might think that there would be a possibility of reversing this trend. But this is more than a pattern. It’s a profound modification of people’s political aspirations, a reaction to a government which is breaking promises, a fundamental re-shaping of how people relate to institutions (i.e., across every political landscape) and of course the crystallizing of a reaction regarding the impact of globalization. It’s not going to go away!

Globalization has ‘taken place’ – it cannot be undone. But what should and will be called into question is the nature of the governance needed to ride out, or domesticate, its consequences. Until a new deal, a new settlement emerges, the electors will crave protection from change, and they will not get it. So they will continue to mobilize in various ways. And as long as this takes place, state actors will be less able to act and react to other threats and continue to create conditions for a re-design of the geopolitical sphere.

So, what does the global landscape look like through the lens of this new populist risk? A necessary consequence of populist mobilization is that the familiar has suddenly become unfamiliar. For decision-makers, whatever the industry, the first noticeable aspect of this new realm is the unpredictability of the people they believed they knew well. Political parties whose positions you thought you could trust split apart and fragment as political leaders are held to political ransom by new populist actors. Prevalent business models come under fire from traditional consumers or even their employees. Rebellion may not be practical, but it is cheap. Citizens and consumers become increasingly unreadable in their preferences and unpredictable in their behavior.

The pressures on the political and policy-making spheres have immediate consequences for other public actors: allies that go AWOL, partners that can no longer be counted upon. And the general unraveling of trusted institutions as behavior is increasingly shaped by the fear of domestic populist politics. The state of the EU vis-à-vis the migrant crisis is a case in point. For investors, populist pressures on policy-makers and politicians have meant a decision-making sphere that can no longer be counted upon either to act as planned or even to respond at all. Everything from sustainable energy transitions to labor market reform, to the free movement of people, is both up-for-grabs and hopelessly very slow. As the wheels of decision-making grind to a stop so does the cost of hedging one’s gambles.

All of which necessitates a new way of looking at populists, namely as reformers. Yes, they can be a threat and even an existential danger to our societies, but instead of ignoring them their surge should be a call for renewal among the traditional political parties. Anecdotally, that was also the view and insight of the reformers of the late 19th- and early 20th-century that kept at a distance for example Marxists by judiciously borrowing their ideas from them. In the United States, Woodrow Wilson and Theodore Roosevelt took on rail and oil cartels, and advocated social insurance to the benefit of everyday man in the street. Germany's Otto von Bismarck’s introduction of health and old-age insurance in his country and David Lloyd George’s “People’s Budget” in Great-Britain in the early 1900s similarly incorporated the populists’ political territory.

Today’s populist have no shortage of ideas to mine. Mass immigration requires better integration that promptly necessitates Western values, language skills, and jobs to newcomers (i.e., meaning if a country already has an existing and endemic high unemployment there is no need to add mass migration to it). Where recorded crime and vandalism is rising, as in Sweden, France and Germany for instance, political leaders should acknowledge it and set about addressing and solving the problem. Expanded relocation and retraining, actions against tax evasion, re-industralization, redistribution of wealth, and portable benefits can help spread the appreciation of free trade and globalization. Galloping digitization and automation should invite a reshaping of education systems and should prompt political reformers to take on tech giants such as Amazon, Microsoft, Apple and Google in the name of consumer protection and competition (and wealth redistribution - meaning the tech giants should pay their regular tax rates as small businesses are doing).

Polarized politics and fragmenting societies make it not probable that the surge of populism will be reversed any time soon. However its excesses can be addressed and even contained by viewing these as an impetus and vector for a change for the better. Because addressing and solving the people’s problems will bear fruit, populism should be viewed as much an opportunity as a threat.