MMP Means Much More Paralysis

Last week Alan Wood, one of Australia’s most respected economic commentators, wrote in The Australian: “Predicting the outcome of New Zealand elections is particularly hazardous because it has the most absurd electoral system of any Western democracy, including Tasmania and the ACT.”

Wood might have added “apart from Germany”, since New Zealand’s mixed member proportional (MMP) system is similar to the German electoral model. According to the Royal Commission on the Electoral System, Germany is the only country to use MMP (although others use other forms of proportional representation).

When the Royal Commission recommended in favour of MMP in 1986, Germany looked to many people to be a successful country economically. To some it still does – finance minister Michael Cullen has been a longterm admirer of what he calls the ‘Rhenish model’.

The admiration is misplaced. Germany rose from the ashes of World War II to become a prosperous nation thanks to the free-market policies associated with chancellor Konrad Adenauer and, particularly, economic minister Ludwig Erhard. But by the 1970s stagnation was setting in with the growth of intervention, deal-making between businesses and trade unions, a big welfare state and high taxation. In the last 10 years, average annual economic growth in Germany has collapsed to 1.3 percent (compared to 3.4 percent in the United States and 3.1 percent in New Zealand), according to International Monetary Fund figures. Germany’s unemployment rate is 11 percent – similar to New Zealand’s peak rate of unemployment prior to the labour market reforms of the early 1990s.

Despite its moribund economy and the widespread recognition of the need to prune the expensive welfare state, loosen labour regulations, cut taxes and wind back public intervention in business, the German political system has thwarted reform. As in New Zealand, Germany’s election last weekend has delivered an inconclusive result. The ‘sick man of Europe’ is likely to remain bedridden for some time yet.

Of course the economy is not the only thing that matters. The basic test of an electoral system is not what economic policies it delivers but whether it makes for a sound democracy. No system is perfect but MMP has serious defects. It tends to throw up weak governments without strong mandates; gives small parties excessive influence in coalitions; institutionalises promise-breaking in post-election negotiations; gives power to central party hierarchies in drawing up lists, so that candidates that are rejected in constituencies end up back in office; and, perhaps most importantly, makes it difficult for voters to decisively throw out a failing government.

From an economic perspective, however, there are other problems.

Research suggests government spending tends to be around 5 percent of GDP higher in countries with proportional representation systems, and high spending and taxation are a drag on growth. The reason for high spending is that parties do deals at the expense of the taxpayer – such as the $5 billion planned spend-up by National and NZ First after the first MMP election. Also such systems are conducive to paralysis in decision making because of the difficulties of managing coalitions, and to compromised and lower quality policy outcomes.

From many perspectives, New Zealand’s election outcome could hardly be worse. Overseas investors will be shaking their heads about the prospects of a country that has to cobble together agreements between perhaps five or six parties to form an administration.

Prime minister Helen Clark has rightly emphasised the need for strong and stable government. Stability is more difficult with PR systems, and in any case it is not the only requirement. As Germany’s experience shows, countries also need to be able to continuously adapt and reform their institutions to cope with economic challenges or they run the risk of longterm decline.

Since the advent of MMP, New Zealand has done little to build on the earlier reforms that have delivered today’s stronger economy. There is no sign of the further improvement in its growth rate necessary to rejoin the ranks of the high income countries. Indeed the return to greater intervention and an end to favourable economic conditions are pointing to a weakening economy and a need for tougher economic decisions. Government paralysis in this situation will be unhelpful, and may trigger a reconsideration of whether MMP suits a small, open economy that needs to be nimble and flexible.

It is voters at large who should make this assessment. There has been a public expectation of another referendum to pronounce on MMP in the light of experience with it. Helen Clark has been a critic of MMP but to date has argued that it is “too soon” to put the issue back to voters. Twelve years and four elections after the 1993 referendum, that argument is wearing thin. Germany’s plight should be a warning that it would be unwise to postpone a reassessment of MMP indefinitely.

Roger Kerr is the executive director of the New Zealand Business Roundtable.

ENDS

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