Regional Development Policies, Demographic Changes, and Rise of Populist Support

• In Event: When Other Governments Matter: Policymaking in Federal Systems

Abstract

Why do the regions benefiting from regional development policies and interregional transfers, mostly delivered by mainstream political forces, often vote for populist and anti-establishment parties and candidates today? Why do they bite the hands that feed them, against the conventional wisdom of vote buying? Even when their socioeconomic indicators are improving over time, those regions that received significant transfers from the center often scare the center and the establishments in elections.
The hypothesis is that conventional regional policies, primarily targeted at local job creation, can attract or retain low- to mid-skilled workers in the area, while high-skilled and educated workers may move to the prosperous urban centers. Such local demographic shifts due to subsidized employment and investment may create a local political economy starkly different from that in metropolitan areas. It will exacerbate the gap in political preferences, leading to a rejection of mainstream politics. This paper builds on the literature of geographic distribution of political preferences and economic geography and challenges the established wisdom of vote buying.
Taking advantage of the discontinuities in the various EU funding schemes as well as those in the EU-wide restrictions on state aid measures, this paper investigates how such regional policies affect demographic change at the municipality level over time, and how it relates to the recent local support for populist political parties. The paper uses a fuzzy Regression Discontinuity Design (RDD) and Genetic Matching, exploiting the province-level state aid and regional funding data, as well as municipality-level census, labor survey and election data in Austria, Belgium, Italy, Poland, and the UK.

Largest beneficiaries of the EU Cohesion fund, such as Eastern Poland, often vote for Eurosceptic parties. The areas that voted for Leave in the Brexit referendum, such as Wales and Cornwall, were also significantly benefiting from EU regional policies. The regions with a favorable record of development thanks to national-level transfers, such as Saxony in Germany or Limburg in the Netherlands, have been strongholds of anti-establishment parties. Outside the EU, Okinawa and Tohoku region in Japan, as well as several rural US states, show a similar combination of significant incoming transfer and hostility to the center, or populist tendencies.
These are novel phenomena. Throughout the latter half of the 20th century, mainstream parties in advanced economies have used regional policies or pork barrel politics to cement their support in underdeveloped areas. Notable examples include Italian Christian Democrats and the Japanese Liberal Democratic Party. The political loyalty they created was robust even though those policies frequently failed to reduce the regional economic gap. The literature on regional redistribution and pork barrel politics developed out of this context.

The skill divide of the modern economy may explain the recent erosion of such link. Subsidized employment can attract or retain low- to mid-skilled workers, and indirectly some small-scale businesses in service sector. Such profiles today tend to correspond well to the support base of populist parties. Artificially supported employment may also trigger the fear of the competition with immigrants, as well as anxiety about liberalization and economic dynamism in general.
As today’s economy shows a significant geographic concentration of economic growth in handful of metropolitan areas and university towns, many skilled and educated workforce move to these innovative areas. Low to mid-skilled workers, who cannot tolerate the living cost in thriving cities, may opt for the regions with subsidized employment. Such contrast will make different local socio-economic dynamics with conflicting demands and goals, thereby creating a polarized political map.

For empirical testing, it is essential to address the issue of endogeneity. The EU rules on various funding eligibility as well as the EU-wide restrictions on state aid measures depends on the categories based on the regional GDP per capita at the provincial level, and it is possible to estimate the effect on such policies with RDD. It can test how the policies affected local demography over time and the recent support for populism. Besides, matching similar municipalities in different states with Genetic Matching will show how similar cities fared demographically with varying degrees of local transfers. A supporting analysis will use difference-in-differences approaches, exploiting the thresholds that change every seven years.
To address the long-term non-employment in deindustrialized areas, economists are now reevaluating the place-based policies for job creation. However, this paper cautions that even if such policies can redress economic inequality, it may potentially accelerate the regional divide in political preferences.

Author

• Makoto Fukumoto, UC Berkeley