The OECD’s growth prospects and political extremism

Hans Peter Grüner, Markus Brückner 16 May 2010

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The global crisis has hit OECD nations hard – the hardest since the crises of the 1930s. As the Great Depression was associated with a rise in political extremism, the world may be facing similar political developments today. Understanding to what extent declining growth rates lead to political extremism is hence of high importance. Is political extremism always likely to be marginal in rich economies? Will changes in growth promote support for right-wing or left-wing parties, or both?

Benjamin Friedman has argued that GDP per capita growth is a key factor for the development of a political system (Friedman 2005). His analysis, based on various historical case studies, points out that only a continuous improvement of individual living standards provides the ground for the development of what he calls a more “open” society. Accordingly, it is not so much the level of GDP that determines the way in which a democracy develops but the growth rate.

Over the last decades, political parties with extreme platforms frequently challenged more moderate incumbents in many western democracies. These entrants into the political market challenged long-term political incumbents with platforms that included major differences in the distribution of resources compared to more standard policies. In many cases, such political platforms propose to redistribute resources away from specific subgroups of society such as ethnic minorities, or citizens of specific regions.

In our recent CEPR Discussion Paper (Brückner and Grüner 2010), we examine the question of how GDP per capita growth is linked to the support for extreme policy platforms for a panel of 16 OECD countries. Our paper highlights the link between political regimes that emerge from the success of extreme electoral platforms and rising individual uncertainty about future income streams. Economic growth makes this uncertainty more costly for risk-averse voters. Declining growth rates reduce incentives of poor individuals to shy away from extreme policy platforms. Redistributing away from specific groups is more tempting when there is little prospect for improvements in the future.

In our empirical analysis, we proxy the support for extreme policy platforms by the share of votes received by right-wing or nationalist parties in the surveys conducted by the ZEUS on voting attitudes during the period 1970 to 2002. Obtaining an estimate of the causal effect of output growth on the support for extreme policies is of course complicated by many other factors – such as history and culture – that likely shape both the support for extreme policies and economic growth. We address this issue by controlling in our empirical analysis for so-called country fixed effects, which allows us to identify the link between economic growth and the support for extreme policies from exclusively the within-country variation of our panel data. We also exploit the significant response of OECD countries' output growth to oil price shocks to study – using instrumental variables techniques – how a plausibly exogenous shock to per capita GDP growth is linked to the support for extreme policies.

Our main finding is that higher per capita GDP growth is significantly negatively linked to the support for extreme political positions. While estimates vary between specifications, we find that roughly a one percentage point decline in growth translates into a one percentage point higher vote share of right-wing or nationalist parties. Moreover, we find that the amount of income inequality in a country affects the role that growth plays. Highly unequal countries display a lower growth effect than more equal countries. For countries with a more equal distribution of income, a one percentage point drop in the growth rate may increase the vote share of far right parties by up to two percentage points.

Our results therefore make clear that countries should not expect right-wing parties to get majorities unless growth declines quite as much as in the 1920s. Nevertheless, even with a less significant fall in economic growth rates, a rise in support for extreme parties is likely to change political outcomes – for example through their impact on incumbent parties’ political platforms.

Our more recent research on the vote shares of other groups of political parties points out that smaller growth rates mostly benefit right wing and nationalist parties – and not so much the communist parties. One explanation for this asymmetry may be that voters perceive right wing parties as generating more individual income uncertainty.

Conclusion

Our results lend support to Benjamin Friedman’s view that economic growth determines the direction in which a democracy develops. This also implies that solving Europe’s growth problem may have important consequences that lie outside the purely economic sphere.

References

Brückner, Markus and Hans P Grüner (2010), “Economic Growth and the Rise of Political Extremism: Theory and Evidence", CEPR Discussion Paper 7723.
Friedman, Benjamin (2005), The Moral Consequences of Economic Growth, Knopf, New York.

 

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Topics:  Global crisis Politics and economics

Tags:  economic growth, global crisis, political extremism

Markus Brückner

Associate Professor in Economics, National University of Singapore

Chair for Economic Policy, Department of Economics, University of Mannheim and CEPR Research Fellow