Containing the populist contagion

With populism seemingly going viral in the advanced economies, the political establishment is in retreat. Outsiders are achieving significant political victories by making dramatic promises to shake up or overthrow the system. The populists’ enemies are members of the “global elite,” who have betrayed national values; and yet their revolt against what US President-elect Donald Trump calls “globalism” also aspires to be a global phenomenon, and actually depends on its own brand of internationalism.
Contagion is a well-understood process in finance. A shock in one place produces tremors elsewhere, even when there are no direct financial links, because pattern-seeking market participants perceive fundamental forces at work.
Today’s populist revolt is exhibiting a similar dynamic. An obvious historical parallel for today is the interwar period of the 20th century, when Vladimir Lenin presented Soviet communism as a global brand, and founded the Communist International. Benito Mussolini’s Italian fascism also adopted an internationalist stance. Similarly, today’s political revolt may be following an unstoppable logic, whereby every country must close itself off to trade, migration, and capital flows, or risk losing out in a zero-sum game. This raises a fundamental question: Can a firewall be built to prevent such political contagion?
Two measures are generally used to stop financial crises and stem financial contagion: International rescue packages and financial reforms. Similarly, we can envisage a political counterpart to such interventions, perhaps with reforms to global governance institutions and existing democratic frameworks. After all, many problems that now affect individual countries are, in fact, transnational, and cannot be addressed by one country alone. Perhaps today’s contagious populism will create the conditions for its own destruction. The substantial uncertainty that it implies could deter investment and choke off growth in already-fragile economies. But autocratic, populist thinking can also thrive off that fear, which is why self-styled “illiberal democrats” promise certainty and continuity, and often make a pact with some part of the business class to guarantee it.
At the moment, the UK provides a striking example of post-populist economics at work. The outcome of June’s Brexit referendum did not cause the economic catastrophe that much of the “Remain” camp had predicted it would. But Brexit’s aftermath has nevertheless been marked by considerable uncertainty and fundamentally incompatible proposals for the country’s future, which has provoked political infighting in Parliament and within UK Prime Minister Theresa May’s government. Brexit is hardly an attractive model for other European countries to emulate. Trump’s upcoming presidency will likely create similar problems, and the president-elect’s promise to remain “unpredictable” could tarnish the populist model further, especially if fears of a trade war, or a dramatic spike in the dollar, owing to looser fiscal policy and tighter monetary policy, cause additional economic uncertainty.
But the US may be uniquely resilient: Because it has historically been the global safe haven in times of economic uncertainty, it may be less affected than other countries by political unpredictability. After the 2008 financial crisis the safe-haven effect caused the dollar to strengthen as capital inflows rose. This has also been the case in the weeks since Trump’s victory. Thus, the economics of US populism will not necessarily fail, at least not immediately, and this could increase its appeal in the eyes of autocratic and nationalist leaders. A big country like the US can generally impose the costs of its unpredictability on other countries but smaller countries, such as the UK, tend to face more immediate costs. As countries reflect on these lessons, they could begin to form defensive regional blocs to protect themselves from the populist contagion. For example, China could start to speak for all of Asia; and the EU might finally find ways to unite against those who would tear it apart. At worst, this new regionalism could fuel geopolitical animosities and reprise the tensions of the 1930s; at best, regional integration could set the stage for sorely needed governance reforms, and thus clear a way out of the populist trap.
• Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation.
©Project Syndicate