Title: Investigating Macroeconomic Determinants of Happiness in Transition Countries: How Important is Government Expenditure?
Authors: Lena Malesevic Perovic and Silvia Golem.
Institution: University of Split, Faculty of Economics and Staffordshire University
Date: March-August 2009
Subject area(s): Economics
Relevance to other area(s): Sociology
Project type: Research article.
Photo by: Path, Creative Commons, Flickr.This paper combines the data from surveys about happiness and macroeconomic data and analyzes the effects of macroeconomic variables on self-reported happiness in transition countries, focusing particularly on the impact of government size in the economy. We use the international data on the reported happiness levels of thousands of individuals and find that government expenditure as a percentage of gross domestic product (GDP) positively and significantly influences happiness in a set of 13 transition countries.
Aims and objectives
The goal of the project was to investigate the impact of macroeconomic variables like GDP and inflation on happiness of individuals in transition countries, with special focus on the impact of (higher) government expenditure.
We use a logit model that uses happiness as the dependent variable regressed against a set of socio-demographic variables, such as gender, marital status, occupation, age and macroeconomic variables such as inflation, GDP, unemployment and government expenditure as a percent of GDP.
The data on happiness, gender, age and other micro-level variables comes from the World Values Survey, waves 3, 4 and 5 and includes the following countries: Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia and Macedonia. The main idea was to
investigate macroeconomic determinants of happiness in, rarely analysed, Central and Eastern
European countries. These would additionally include Bosnia and Herzegovina and Serbia
and Montenegro, but, due to data limitations, we had to exclude the former two countries
from the analysis
Data on macro variables (inflation, GDP per capita, unemployment and government expenditure) was taken from the World Development Indicators for consistency reasons. These macro-variables are often included in similar research, but there is no clear-cut theory as to guide us here. The particular variables we include are especially interesting as they can be influenced by economic policy.
This paper analyses the effects of macroeconomic variables on happiness in transition countries, focusing particularly on the impact of government size. The emphasis is on transition countries because they are idiosyncratic in many ways and have, within this strand of literature, been under-investigated. Furthermore, this set of countries has been experiencing a slowdown in the size of government since the beginning of transition. Since there is no clear-cut theory which would straightforwardly explain the effect of this trend on happiness, we approach this issue empirically. We, therefore, believe that our results might be of interest for governments in transition economies.
This paper finds that government expenditure positively and significantly influences happiness in transition countries. This result supports the standard neoclassical view that government is a benevolent actor and government intervention is beneficial. This finding is comparable to results in Ram (2009), who also finds the positive relationship for a large cross-country sample. Bjornskov et al. (2007), on the contrary, find a negative relationship between life satisfaction and government consumption spending in a set of 74 countries. The positive influence of government expenditure on happiness would suggest that the slowdown in the size of government experienced by these countries might not have been in line with the wishes of the populace. The question of whether or not the government involvement in the economy increases happiness is particularly timely in the view of the ongoing financial crisis. Recent times, characterised by the slowdown of economic growth and increase in unemployment, have somewhat altered popular view against public expenditures among economists. On the contrary, we have witnessed renaissances of government intervention in many developed and developing countries. Between the extremes of virtually no government and a pure communist state, how much government is necessary and desirable is rather difficult to speculate. This research sheds some light on this debate from a distinctive point of view.
Another specificity of our paper is that we go one step further. Instead of restricting our analysis to a vague concept – average respondent, we present our results for current macroeconomic values and specific individual to give the marginal effects more realistic meaning. To be more precise, we find that “successful women” in transition countries appreciate additional increases in quality of life that can be achieved only through publicly provided goods and services more than “unsuccessful men” do. This is in line with explanations provided by Ng and Ng (1998) who suggest that after a certain level of private spending is reached, further increases in private spending would result in smaller increases in happiness than proportional increases in public spending would.
Article published as: Malesevic Perovic, L. and Golem, S. (2010). "Investigating Macroeconomic Determinants of Happiness in Transition Countries". Eastern European Economics Journal, Volume 48, Number 4. Pages 59-75. July-August 2010.DOI 10.2753/EEE0012-8775480403
References and/or acknowledgements
Bjornskov, C., Dreher, A. and Fischer, J. A. (2007). “The Bigger the Better? Evidence of the Effect of Government Size on Life Satisfaction around the World.” Public Choice, 130. Pages 267-292.
Ng, S. and Ng, Y.K. (1998). “Why Do Governments Increase with Growth but Happiness Remains Unchanged?” SSRN Working Paper Series.
Ram, R. (2009). “Government Spending and Happiness of the Population: Additional Evidence from Large Cross-Country Samples.” Public Choice, 138. Pages 483-490.