From Brexit to Trump: Why conventional wisdom at Davos is always wrong

Did the global elite's devotion to borderless capitalism sow the seeds of a populist backlash?

Kenneth Rogoff can pinpoint the moment he started to grow concerned Donald Trump would be the next US president: It was when Rogoff’s fellow attendees at the World Economic Forum’s annual meeting last January said it could never happen. “A joke I’ve told 1,000 people in the months since leaving Davos is that the conventional wisdom of Davos is always wrong,” says the Harvard professor and former chief economist of the International Monetary Fund. “No matter how improbable, the event most likely to happen is the opposite of whatever the Davos consensus is.”
 
The repeated failure of business and political elites to predict what’s coming — last year, that included the UK’s vote to leave the European Union — doesn’t strike those returning this month to the Swiss Alps as very funny. After a year in which political upsets roiled financial markets and killed off the careers of once-dominant Davos-going politicians, the concern for delegates attending this year’s meeting isn’t that their forecasts are often wrong, but that their worldview is.

 
In its four decades of existence, the WEF has nurtured a broad consensus in favour of globalisation and open markets. At its core is the notion that capital, goods, and people should be able to move freely across borders, a principle that can deliver huge benefits to those with education and money but seems terrifying to those without either. For the 3,000 people who will convene in the small Swiss town from Jan. 17 to 20, the 2017 event could be a moment of reckoning. At speakers’ podiums, coffee bars, and the ubiquitous late-night parties, they’ll be asking themselves whether Davos has become, at best, the world’s most expensive intellectual feedback loop — and, at worst, part of the problem. “Since the recession, the boom has benefited the upper-income earners and done little for those in the middle or on less. That’s the backlash,” says Nariman Behravesh, the chief economist for research provider IHS Markit. “The Davos vision of the world has not delivered a broad-based economic recovery.”

 

That the world is entering an era of populism that could tear apart long-established global bonds is beyond question. The result of the Brexit vote threatens the UK’s most important trading relationships. In the US, Trump will take office this month having pledged to reopen trade deals and reevaluate bedrock foreign policy principles such as the so-called One China policy. Italian Prime Minister Matteo Renzi resigned in December after voters rejected proposed constitutional changes.
 
In France, hard-right leader Marine Le Pen leads opinion polls going into this spring’s presidential election.
 
And in Germany, where elections also loom, the anti-immigrant Alternative for Germany party has sought to capitalise on mounting opposition to Chancellor Angela Merkel’s open-door policy for refugees fleeing Mideast war zones, which some believe has left the country vulnerable to terrorist attacks such as the one in Berlin on December 19. Almost a third of bond investors surveyed last month by Bank of America Merrill Lynch identified populism as their biggest concern, up from 9 percent in October.

 
Collectively, anti-establishment forces may represent the greatest threat to what historian Samuel Huntington called “Davos Man,” a cross-border species whose values and interests are often divorced from those of more insular compatriots. While each populist movement is unique, all share a generalised disdain for elites, however defined—and by extension, the economic prescriptions they promote. Huntington, who died in 2008, may have divined the future when he said Americans might eventually rebel against rising immigration, especially from Mexico, and the growing influence of multinational businesses and intellectuals.
 
Some Davos regulars worry those sentiments will lead the U.S. and other nations down a dark path. “The last time that we had a convergence of fear of globalisation, fear of economic stagnation and poverty, fear of the international, it was after the 1929 crash,” says Ngaire Woods, dean of the Blavatnik School of Government at Oxford University and a frequent Davos visitor. “We really have to learn the lessons of the 1930s.”

 
This year’s conference agenda makes clear the degree of anxiety. Sessions include a panel of psychology experts offering thoughts on “cultivating appropriate emotions in a time of nationalist populism.” Another, titled “Squeezed and Angry: How to Fix the Middle Class Crisis,” will star International Monetary Fund chief Christine Lagarde alongside hedge fund billionaire Ray Dalio. Separately, Facebook executive Sheryl Sandberg and Meg Whitman, chief executive officer of Hewlett Packard Enterprise, will try to stoke optimism in a chat about shaping “a positive narrative for the global community.”
 
The most talked-about guest will undoubtedly be Chinese President Xi Jinping, who’s attending for the first time. He’ll be pitching a Chinese-led rival to the Trans-Pacific Partnership, the proposed pan-Asian trade deal that died with Trump’s election. It’s an irony of the times that it’s Communist-run China that’s promoting free trade.

 
Davos veterans are meanwhile trying to foster a global capitalism that’s more in tune with the global mood. The IMF’s Lagarde said in December she wants a “move toward globalisation that has a different face, and which is not excluding people along the way.” BlackRock Vice Chairman Philipp Hildebrand said in an interview that it’s important “there be some repositioning to show Davos can make a contribution to dealing with the fundamental issue of inequality of opportunity.”
 
All is far from lost for the Davos set. Critics predicted the death of the Davos consensus after the 2008 global financial crisis, only for the conclave’s prominence to continue to rise as the masters of the universe kept showing up. Global equities have rallied since Trump’s election, with the benchmark MSCI World Index nearing record highs, as investors bet that his administration will pursue an expansionary fiscal policy and slash regulations on industries such as finance. Trump may not be an adherent of the liberal internationalism preached at Davos, but he could prove quite beneficial to its proponents’ bank balances, at least in the short term.

 
What’s more, his cabinet is packed with individuals who would be much more comfortable on the Swiss town’s central promenade than at, say, a Wisconsin Walmart. Trump’s National Economic Council director, Gary Cohn, is well-known at Davos because of his former life as president of Goldman Sachs. Another Trump confidant, hedge fund manager Anthony Scaramucci, has traditionally hosted one of the event’s best-attended annual parties.
 
Even as Davos attendees say they aren’t about to stop advocating for the policies they’ve endorsed for decades, which they believe remain the best way to deliver prosperity, it may be time to concede they’ve been going about it the wrong way. “There has to be some humility. For 30 years the elite have said, ‘We’re managing globalisation, and we’re making it work for everyone,’ ” Woods says. “They cannot just keep repeating that.”

 
The bottom line: The Davos consensus nurtured by four decades of World Economic Forum meetings is at best broken and at worst dead.