This is the third part of Tutwa’s mini-series, Populism on the rise, which is dedicated to the reaction to populist movements and politics in order to maintain a liberal world economic order (Pax Americana), which I regard as the preferred regime for most. Three main actors to combat populist threats can be found in politics, science and the business community.

The role of politics

Economic policy has to react to populist governments abroad, such as President Trump, President Erdogan, or Prime Minister Orban, as well as to populist threats at home such as the Alternative für Deutschland (AfD) in Germany or the Front National (FN) in France. To start with external populists, let us take the example of the US President who demands the reduction of trade surpluses against the United States (US), something US savers could best do themselves, threatens the introduction of high import tariffs, and suggests bilateral “deals”. Chancellor Merkel gave a good example of a proper reaction.

  • First, she, as well as the European Commission, made clear that European Union (EU) member countries are bound by the European Treaty: trade policy is a common policy issue, with the Commission being exclusively responsible. Bilateral deals are impossible. Rumor has it that Mrs. Merkel had to explain the EU’s principle to President Trump eleven times.
  • Second, it is important to keep calm and refrain from threats of retaliation. Mrs. Merkel correctly pointed to the multilateral trading system as organized within the World Trade Organisation (WTO). Special American tariffs against European, Chinese or Mexican companies will be a case for the WTO’s Dispute Settlement Mechanism (DSM).
  • Third, there are partners for trade outside of the US. Directly after President Trump dumped the Transpacific Partnership (TPP), the Australian Prime Minister suggested to get China on board, knowing very well that one major American objective of TPP was to exclude China. Similarly, the EU is advocating for and negotiating free trade agreements (FTAs) with a number of countries, among them Australia, New Zealand, Japan, and Mexico. Even an FTA with China may not be utopian anymore.

Domestically in Germany, one might think of mutual commitment of political parties to not take recourse to populist actions or statements. Experience suggests that this does not help. In addition, real populists would mock this as another conspiracy of elites against the peoples’ will. Internationally, this has no chance. Why should President Trump agree to such a commitment?

However, there is already good news stemming from five months of populist government in the US. It seems as if the walking-stick-hypothesis cannot be confirmed in the States. Instead of a flourishing economy we witness chaos and idleness, the President has not managed to succeed with any of his plans so far. Everyone abroad sees this failure, which obviously weakens the populists in Europe immensely. Elections in the Netherlands and France did not go well for populists, the German AfD has not dared to connect to Trumpism; instead they tend to ignore the US President. Even Prime Minister May has suffered from an electoral setback, dealing a blow to the populists backing Brexit.

This experience may force governments to finally resort to a rational, long-term-oriented, rule-based policy path. Against this background, those politicians who argue for a western style ruled based liberalism and against ad-hoc politics may gain ground. The liberal party in Germany (FDP) – thrown out of the Bundestag in 2013 – has high hopes to return into the German Parliament in September’s general election. In two recent state elections (in Schleswig-Holstein and North Rhine-Westphalia) they could celebrate very good election results.

One can only hope that US experiences are also relevant for South African politics, where a populist president is giving his countrymen a hard time. In any case, populist experiences reduce the opportunity costs of rational policies.

In addition to advice on what to do, the populist episode suggests two things not to do. First, established parties should not try to mimic populists and argue in the same – simplifying – way. It may be a temptation to also simplify matters, but as can be seen in France, voters take attempts of policymakers to be serious earnestly, and honor them.

Second, it does not make sense to exclude populist parties from political circles. During the German Protestant Church Congress in May, some leading bishops and laymen engaged into a public debate with a Christian AfD politician and were fiercely criticized. I regard this criticism as wrong since the best way to unmask the populist is to engage in discussions with them. Their arguments are systematically weaker than those of rational actors. So populists must be challenged whenever the chance is there.

How can economic science help to combat populists?

The debate about the role of economics in society is a long-standing one. Critics of mainstream economics argue that an economic profession too blind to predict the outbreak of an enormously distortive worldwide financial and economic crisis in 2008 should change its methodological and topical focus. Indeed, part of economics has become too focused on internal rankings and methods instead of focusing on relevant policy questions.

Today’s credo of “publish or perish” leads young scholars particularly to specialize too early in their career and to neglect urgent policy issues, since theoretical and methodological contributions can be published in highly ranked journals. The discussion of, for instance current South African labor market problems is not of interest for the typical reader of the American Economic Review.

Thus, economic science can support rational policymakers by discussing important issues and allow for methodological variety. Underrated topics comprise political economy, theory of economic policy, economics of entrepreneurship, balance of payment theory, and problems of distribution. It is necessary to change the reward system in economic science.

Responsibility of Business

Finally, the responsibility of the business community must not be underestimated. Two aspects come to mind immediately. First, the salary structure – particular the relation between management and workers’ pay as well as the sheer size of bonuses – has to be reconsidered in most listed companies. It seems as if the majority of top managers have lost touch with the ordinary man. As said before, this creates frustration and the potential for simple messages to get attention.

Second, entrepreneurs who own their businesses must take responsibility in their community. They should grant adequate working conditions and pay decent salaries; both actions seem self-evident and unnecessary to mention. Next, local enterprises can sponsor local activities, e.g. social, cultural or sport events. Finally, entrepreneurs can volunteer in many contexts, e.g. in the city council or on the board of a local charity. In other words, they can provide a positive image to society and thereby contribute to the social stability of a society. This will certainly discourage populist movements.

The strategies mentioned here require stamina since they are indirect and respect democratic values. But an undemocratic response to seemingly undemocratic populist initiatives (which indeed are mostly an expression of democratic variety) cannot be accepted. The European example can be a cautiously interpreted sign that a rational long-term-oriented response to populist threats may well be successful.