Davos 2014

Larry Elliott

The rich and powerful at the World Economic Forum are not as worried as they should be about the gap between rich and poor...

Those on the outside might imagine that the business leaders who gather in Davos each year to chew the fat are concerned only about enriching themselves. Critics might imagine that the company bosses, jetting to the World Economic Forum 5,000 feet up in the Swiss Alps in their helicopters, mink-clad trophy wives in tow, are oblivious to the struggles of the poor. But they would be wrong.

As the rich and powerful make their last-minute preparations for their week up the magic mountain, they want the message to be sent out that they understand about inequality. They feel the pain. Truly they do.

The evidence for the "Davos gets it" line comes from the annual risk report compiled by the WEF. It asks 700 of its members what they think will be the most pressing threats to the global economy over the coming decade. Inequality is seen as the most likely risk.

Klaus Schwab, who created the Davos meeting in the 1970s, is pleased about that finding. As a good old-fashioned social democrat, he wants his members to take a history lesson and realise that capitalism cannot survive if income and wealth become concentrated in too few hands. For much of the 20th century, the more far-sighted business leaders realised this. They understood that their workers needed reasonable wages so that they could buy the goods and services they were making. They grasped the idea that a market system in its rawest form was incompatible with democracy and so acquiesced while some of the rough edges were knocked off via progressive taxation, welfare states and curbs on capital. Deep down, they feared that the Russian revolution would provide a template for disaffected workers in the west.

Attitudes have changed in the past 30 years. The so-called Great Compression of incomes seen from the 1930s to the 1970s went into reverse, with the top 1% grabbing the fruits of growth. The rich used their money and their influence to ensure that governments did their bidding. After the Berlin Wall came down, there was no rival model and less need to show restraint. With the arrival of a unipolar world came a return to a more aggressive form of market economics that had not been seen since the early days of industrialisation.

Schwab said last week that uninclusive growth is unsustainable, and he is right. A paper released today by Oxfam makes the same point, noting that the richest 85 people in the world have the same amount of wealth – $1.7tn – as the bottom half of the Earth's population. That's quite a staggering figure. You could get these 85 people on a London double-decker bus (not that they would ever be seen on a bus) and they would be as wealthy as 3.5 billion people.

The counter-argument is that there is much less poverty than there was 15 or 20 years ago, and this – in large part due to three decades of explosive growth in China – is true. Those who argue that a rising tide lifts all boats wonder what all the fuss is about.

The fuss is about three of the topics that will feature on the Davos agenda this year: the durability of economic recovery, climate change, and the gap between rich and poor. In the run-up to the crisis of 2007-09, rising inequality was compatible with expansion only because of ever-higher levels of personal debt. Since the crisis, the show has been kept on the road thanks to unprecedented stimulus from central banks. In the short term, the concern is what will happen in the more fragile emerging market economies as the US Federal Reserve tapers away its asset-purchase programme. The dollar-printing process led to hot money flooding out of the US and into higher-yielding emerging market currencies; the winding down of the programme may see it flooding out again.

A longer-term concern is that the sustained squeeze on real wages – an intensification of the trend of the past quarter-century – will mean that people borrow more to fund their consumption habits just as the phasing out of the stimulus makes borrowing more expensive.

The second big question, which has lain dormant since the crisis, is whether the current global growth model is consistent with preventing the planet from frying. Recessions always push environmental issues down the agenda, and this has been a particularly deep and painful recession. The lack of global co-ordination and the (misguided) belief that fracking is the answer to the world's energy needs have not helped matters.

Finally, there's inclusivity. The recession has been particularly brutal on the young, many of whom are either unemployed or doing jobs for which they are overqualified. In many emerging market countries, populations are weighted towards the under-25s, the group most likely to migrate or cause social unrest at home. Modern media makes the skewed distribution of wealth, power and opportunity all too apparent.

As the Oxfam report put it: "When wealth captures government policymaking, the rules bend to favour the rich, often to the detriment of everyone else. The consequences include the erosion of democratic governance, the pulling apart of social cohesion, and the vanishing of equal opportunities for all. Unless bold political solutions are instituted to curb the influence of wealth on politics, governments will work for the interests of the rich."

There will no doubt be plenty of support in public this week for Schwab's line on inequality. Eyebrows will be raised and hands will be wrung at some of the more striking findings of the Oxfam report, such as that in the US, the wealthiest 1% have captured 95% of post-financial crisis growth since 2009 while the bottom 90% have got poorer.

But don't expect much support for any of Oxfam's suggested remedies for inequality: that corporations should stop using offshore boltholes to avoid tax; that business leaders should support progressive taxation, universal provision of health and education, and a living wage in all the companies they control. The CEOs in Davos may be worried about the impact of inequality but they are not that worried, and not nearly as worried as they should be.

Schwab could make life more uncomfortable for his guests by naming and shaming the aggressive tax avoiders, declining to invite them to his annual talkfest. This, though, would leave many empty rooms in Davos.

Instead, companies such as Google (UK 2012 turnover: £3bn; UK profits: £900m; corporation tax: £11.6m) can pretend they are good global citizens. Journalists have this year been invited to a "fireside chat" with Eric Schmidt, as if to show that the Google chairman is not a ruthless tycoon but the reincarnation of Franklin Roosevelt.

Memo to self: things to pack for Davos this year – boots, woolly hat, gloves, sick bag. /Guardian