Political Extremism and Economic Activity

In a new working paper, Matthew Rao, Christis Tombazos (Monash University) and myself, study the effect of economic activity on the vote share of extremist political parties
in Europe.

We combine data on election outcomes and regional GDP for  218 NUTSII regions across 16 European countries and 90 elections during 1990-2016.

An important challenge that we face is that economic growth is endogenous to political outcomes.2 This could be the result of unobserved variables that simultaneously drive economic fluctuations and voting behavior. For example, extensive immigration may contribute positively to economic growth and, independently, to the electability of far-right candidates that typically promote isolationist policies (Becker and Fetzer, 2016). Alternatively, endogeneity may result from reverse causation. For instance, electoral success by far-left parties may lead to programs that decrease wage inequality which can, in turn, impact on economic growth (Madsen et al., 2018).

We overcome this problem by carefully constructing an appropriate instrumental variable. Our instrument interacts global prices of minerals with the existence of regional mining activity
in such minerals that predates the electoral contests under consideration.

We find that even small fluctuations in economic growth have significant inverse effects on the vote share of far-right parties. However, we do not find similar effects of the vote share of far-left parties.