Is proportional representation bad for the economy?
Claim: “Asked why a business organization is leading the legal fight against proportional representation, Gardner said his organization fears it would be bad for the B.C. economy.”
Stated by: Chris Gardner, Independent Contractors and Business Association (ICBA), Vancouver Courier July 3 2018.
NOTE: The claim about the economy is often paired with the claim about “instability” – read the Fact Check on stability here.
Fact Check Summary: proportional representation and the economy
The claim that proportional representation is bad for the economy is false.
The relationship between different aspects of economics and electoral systems is complex. It is an area of ongoing research with mixed findings.
There is certainly no consensus among researchers that proportional representation is “bad for the economy.” If anything, more evidence points in the opposite direction.
A summary of the research on electoral systems and economics:
Economic growth: The latest and most comprehensive research on the relationship between electoral systems and economic growth points to higher economic growth in proportional systems.
Economic stability: There is research showing less economic volatility and higher investor confidence in countries with proportional representation.
Debts, deficits and surpluses: Here the research is mixed. There is research showing higher debt and deficits in countries with proportional systems. There is also research showing lower debt and deficits (and higher surpluses) in countries with proportional systems.
There is research showing that the degree of proportionality is what makes the difference, with “low magnitude” (moderately) proportional systems outperforming both winner-take-all and fully proportional systems. (See more in the detailed section below).
Social expenditures: There is consistent research showing higher government spending on social expenditures in countries with proportional systems. (There is also consistent research showing countries with PR have lower levels of income inequality and score higher on the UN Human Development Index).
Overall spending: Research on overall spending is mixed. There is some research showing higher spending overall in countries with proportional systems (not just on social expenditures), however, more recent data does not show any difference in levels of spending between proportional and winner-take-all systems.
For those who want a lot of details on each of these areas, see below.
- The relationship between proportional representation and economic growth seems to depend on the sample being used. Lijphart (2012) and Orellana (2014) found no relationship between electoral systems and economic growth. However, when Knutsen (2011) looked at a much longer historical period involving 3,710 country-years of data covering 107 countries from 1820 to 2002, he found that proportional and semi-proportional systems produced an “astonishingly robust” and “quite substantial” increase in economic growth – a one percentage point increase – compared to winner-take-all systems. He suggests that this may be because PR tends to promote broad-interest policies rather than special interest policies.
- Knutsen’s empirical results are corroborated by more recent work by Alfano and Baraldi (2015) who studied 91 countries from 1979–2010. According to Alfano and Baraldi’s results, a country with a highly proportional electoral system could expect an annual growth rate one percentage point higher than a country with a GI of 14. A one percentage point difference is also what Knutsen found. Alfano and Baraldi’s research suggest that the growth rate reaches its maximum in countries with a moderate level of proportionality, peaking at a Gallagher Index level of 6.5. The predicted growth rate drops sharply for countries with significantly disproportional voting systems. (Click for information on the Gallagher Index, measuring disproportionality in elections).
- Norris (2011, John F. Kennedy School of Government, Harvard), examining the relationship between different aspects of democratic institutions and economic growth concluded, “the direct effects of proportional representation electoral systems are also significantly related to income, further confirming Knutsen’s conclusions” (of higher economic growth with PR).
- What emerges from this body of research is that proportional systems categorically and strongly outperform non-proportional systems in terms of economic growth. It seems that even a modest level of proportionality is helpful. In Knutsen’s work, semi-PR and PR countries seem to achieve much the same result in terms of growth rates.
- Nooruddin’s (2011) study of economic volatility and electoral systems found that coalition governments produced less economic volatility due to more stable economic policy. They are less prone to “policy lurch” (where one government undoes the policies of the previous government). He notes:
“When a single party controls all the levers of the legislative process, it is better able to enact policies closer to its ideal point. The resulting policy might in fact be the preferred outcome for economic agents too (for instance, if the government in question favors a business-friendly policy regime), but the government can not guarantee that future governments will not reverse course should the opposition win. In this case, even if economic agents respond by investing in the country, they will remain wary of future policy change, and therefore forgo more irreversible investments.
Using cross-national time-series data from over 100 developing countries, that even after controlling for plausible alternative political factors and for theoretically-relevant economic factors, coalition governments in parliamentary democracies have higher growth rates than other forms of government, and such governments experience lower growth-rate volatility.”
- Most researchers agree that countries with proportional representation spend more on average on social expenditures as a percentage of GDP (social programs, education, pensions etc). For example, Lijphart (2012) found that countries with PR spent an average of 4.75% more on social expenditures than majoritarian democracies.
- Orellana (2014) found the countries with proportional representation spend less on military expenditures.
Researchers cited by both opponents and proponents agree that single-member districts and winner-take-all-systems both tend to pull in the direction of narrowly targeted programs benefiting small geographic constituencies. Conversely, multi-member districts and proportional representation induce politicians to provide benefits for broad groups of voters.
Building on this insight, some recent papers have studied the influence of the electoral system on the composition of government spending. Specifically, they looked at single member (winner take all) systems and multi-member (proportional) systems. Here is how Perssons and Tebellini put it (2008):
“Multi-member districts and proportional representation diffuse electoral competition, giving the parties strong incentives to seek electoral support from broad coalitions in the population through general public goods or universalistic redistributive programs (e.g., public pensions or other welfare programs). In contrast, single-member districts and plurality rule typically make each party a sure winner in some of the districts, concentrating electoral competition in the other pivotal districts. Both parties thus have a strong incentive to target voters in these swing districts.”
- Multiple researchers (Birchfield, Vicki and Crepaz, Markus (1998), Iversen, T., & Soskice, D. (2006), Lijphart (2012), have found lower levels of income inequality in countries with proportional systems.
- It is important to note that unlike many of the List PR systems in Europe (most of the OECD), the proportional models proposed for Canada all retain local MPs elected by voters in specific ridings and regions. They do not include any MPs accountable only to voters in the country as a whole. Thus the incentives for local MPs to advocate targeting spending locally would be expected to continue in Canada.
- Research by Persson and Tabellini – summarized by Clemens and Jackson for the Fraser Institute – and by Perotti, Rostagno and Milesi-Ferretti (2001) found that countries with proportional systems had higher government spending overall (not just on social expenditures).
Increased spending in countries with coalition governments has been showing to be related to the number of parties in government (the more parties in a coalition, the more spending). This research is often cited by opponents of proportional representation.
However, research by Funk and Gathman (2010) looking at the effects of adopting proportional representation in Switzerland from 1890 to 2005 (over 110 years, 23 of the 25 cantons adopted PR) found that while PR increased social expenditures, overall spending did not increase:
“Proportional systems shift spending toward broad goods (e.g. education and welfare benefits) but decrease spending on targetable goods (e.g. roads and agricultural subsidies). Our evidence does not suggest that proportional representation increases the overall size of government.”
Research by Martin and Vanberg (2013) challenge the traditional findings that more parties in a coalition mean more spending. In their study of 15 European democracies over 40 years, they show that budgetary rules can “eliminate expansionary pressures on spending”. For example, determining from the outset that the budget will be (X dollars) means that if one Ministry wants more money, it has to come out of another Ministry’s budget. In terms of winner-take-all vs proportional systems, they conclude:
“Our results demonstrate that at least for fiscal measures, there is no trade-off involved. Appropriate fiscal institutions can lead coalition governments to behave in budget making much as single member governments do.”
- There is currently little difference in overall spending between OECD countries using proportional and majoritarian systems.
Deficits and Public Debt
- Orellana (2014) found that “countries with more proportional electoral systems and more diverse party systems may actually tend to have lower budget deficits (higher surpluses) than countries with first-past-the-post systems and less diverse party systems.“ He found that the projected national debt is 65.7 percent higher in majoritarian countries than in those with fully proportional systems.
- Previous research by Perssons and Tabelline (2003), as cited by Clemens et al. for the Fraser Institute (2016), had come to a different conclusion, finding higher deficits and debt in countries with proportional sytems. Orellana, argues that Perssons and Tabellini’s research was flawed due to the way they classified the electoral systems of certain countries. For example, Greece, an extreme outlier with a very large debt load, was treated as a country with a proportional system by Perssons and Tabellini. However, Greece’s system works more like a majoritarian system, by giving the party with the most seats a considerable winner’s bonus (currently 50 seats out of 300 in total).
For the best performance, balance may be the key
Alfano and Varaldi (cited above in the section on economic growth) found higher economic growth in countries with moderately proportional systems. Along a similar line, Carey and Hix (2010 – London School of Economics) found that moderately proportional systems with an average number of seats per region between 5 and 9 did better than both winner-take-all and highly proportional systems on other measures as well:
“Where government performance is concerned, small multi-member district systems outperform both single-member district and large multi-member district systems. Government spending tends to be lower in small multi-member districts than either single member district or large multi-member district systems. And, societal welfare and economic development – as measured by the UN’s human development index – tends to be considerably better in small multi-member systems than in single-member district systems and indistinguishable from the levels of development achieved in systems with very large multi-member districts.”
Alfano, M. & Baraldi, A. (2015). Proportional Degree of Electoral Systems Growth: A Panel Test. Rev. Law Econ. 2015; 11(1): 51–78.
Birchfield, Vicki and Crepaz, Markus (1998). “The Impact of Constitutional Structures and Collective and Competitive Veto Points on Income Inequality in Industrialized Democracies.” European Journal of Political Research 34: 175-200.
Carey, John M. and Hix, Simon (2009). “The Electoral Sweet Spot: Low-magnitude Proportional Electoral Systems. PSPE Working Paper 01-2009. Department of Government, London School of Economics and Political Science, London, UK
Jason Clemens, Taylor Jackson, Steve LaFleur, and Joel Emes (2016). Electoral Rules and Fiscal Policy Outcomes. For the Fraser Institute: https://www.fraserinstitute.org/sites/default/files/electoral-rules-and-fiscal-policy-outcomes.pdf
Funk, Patricia and Gathman, Christina (2010). How do electoral systems affect fiscal policy? Evidence from state and local governments 1890-2005. CESifo Working Paper.
Iversen, T., & Soskice, D. (2006). “Electoral Systems and the Politics of Coalitions: Why Some Democracies Redistribute More Than Others. American Political Science Review 100-2: 165–81.
Knutsen, Carl (2011). “Which Democracies Prosper? Electoral Rules, Forms of Government, and Economic Growth.” Electoral Studies 30: 83-90.
Lijphart, Arend (2012). Patterns of Democracy. Government Forms and Performance in 36 Countries. New Haven, CT: Yale Press.
Lanny W. Martin and Georg Vanberg (2013). Multi-party government, fiscal institutions and public spending.The Journal of Politics, Vol. 75, No. 4 (Aug. 28, 2013), pp. 953-967 (15 pages).
Nooruddin, Irfun (2011). Coalition Politics and Economic Development. Credibility and the Strength of Weak Governments. Cambridge University Press.
Norris, Pippa (2011). Making Democratic-Governance Work: The Consequences for Prosperity. HKS Faculty Research Working Paper Series RWP11-035, John F. Kennedy School of Government, Harvard University.
Orellana, Saloman (2014). Electoral Systems and Governance: How Diversity Can Improve Policy Making. New York: Routledge Press.