Economic Crisis, Markets, and Democracy in Latin America: Some Evidence From the Economics of Happiness

As crisis after crisis has swept through Latin America, optimism about the region's turn to the market and democratic government during the mid-1990s has given way to grave concern. Most of the economic and political news lately has been disheartening—Argentina's economic collapse and subsequent default on its debt, threats of defaults in Uruguay and Brazil, strikes and stagnation in Venezuela, and often violent protests against tough economic measures in Ecuador and Bolivia. Even Chile, supposedly Latin America's "tiger," is slated to grow only 2.5 percent in 2003, with unemployment at 9.5 percent—higher than it has been in two decades. Longstanding social and economic ills—the world's highest inequality rates, along with high incidences of poverty, violence, crime, and corruption—continue to plague the region.

How will the financial crises affect a region already suffering from reform fatigue? Will declining public backing for market policies translate into support for radical alternatives? Will frustration erode individuals' faith in future progress, for themselves and their children? Will diminished individual well-being lead to increased social and political unrest? We attempt to shed light on these questions based on an analysis of the Latinobarometro, a regionwide public opinion survey that explores respondents' perceptions and other measures of well-being broader than simple income criteria.

Happiness and Economics

Although research on happiness has traditionally been the realm of psychologists, economists have recently begun to analyze subjective well-being and its relation to objective economic conditions and individual economic behavior.

Building on early work by Richard Easterlin, economists' findings have underlined the importance of nonincome determinants of well-being, such as health, marital status, and job security and satisfaction, as well as the role of relative income differences and economic insecurity.

Considering these results often leads to assessments of welfare that depart sharply from conventional assessments—and have quite different implications for policy.

Economic Crisis and Happiness in Latin America

The crises in Latin America in the past year may well have affected subjective well-being in the region, in turn affecting public attitudes about markets and democracy in the region. We explore the relationship between subjective well-being and public support for market policies and democracy in 17 countries in Latin America, with approximately 1,000 respondents in each country.

As a simple exercise (and accepting the methodological problems of comparing happiness levels across samples and years), we compared mean happiness scores on the Latinobarometro in 2002 and 2001. The share of respondents describing themselves as "very" or "fairly" happy fell from 68.2 percent in 2001 to 65.4 percent in 2002; the share describing themselves as "not at all" or "not very" happy rose from 31.8 percent in 2001 to 34.7 percent in 2002, differences that are statistically significant.

These declines in happiness may well be temporary, and substantial evidence suggests that most people eventually adapt to what psychologists call homeostasis, or a "normal" (for each individual) level of happiness, even after major negative life-changing events—though how and how quickly individuals' subjective well-being recovers to "normal" after national crises is uncertain.

Still, the decreases in happiness in the region are likely to have some negative spillover effects. Research in Latin America by one of the authors (Graham) and Stefano Pettinato, for example, finds that happier people are, on average, more supportive of both markets and democracy. While it is difficult to establish the direction of causality in this link, decreases in happiness in the region could jeopardize a virtuous circle.

In addition, deeper analysis of regional happiness evinces cause for concern. Research in the United States, Russia, and Latin America has documented that in general, people grow less happy as they grow older, until at about age 45-50 (depending on the country) their happiness levels start increasing. Our calculations for Latin America in 2002 show a sharp increase in this age-inflection point to more than 60, a reflection, perhaps, of heightened anxiety among people approaching retirement age.

Can Market Policies Be Sustained?

Much has been written in the popular press in recent months about the potential backlash against market policies and reforms. Ignacio da Silva (Lula), the newly elected president of Brazil, the region's largest economy, is a former union leader known for his strong anti-market platform. Protests against privatization brought down a star-studded cabinet in Peru in July 2002. Demonstrations against water privatization paralyzed economic activity for days in Ecuador, Bolivia, and Argentina soon thereafter. The political landscape in troubled Argentina, once a bastion of support for the region's free-market reforms, is at best unknown.

Are Latin Americans turning away from the market? That is certainly a plausible interpretation of the above events. Another, however, is that most Latin Americans accept basic market principles but increasingly also want governments that can provide decent social services and social insurance. For example, all the presidential candidates in Brazil, including Lula, tempered their antimarket rhetoric as the election approached. Although they might have modulated their rhetoric to calm jittery financial markets and ensure the sustainability of the $30 billion bailout granted by the International Monetary Fund earlier in 2002, they may also have recognized that being antimarket alone is not an effective message. Similarly, the front-runner in the November 2002 Ecuadorian elections, Lucio Gutierrez, a candidate known for his antimarket stance, went to great pains to convince the financial markets that he was neither a populist nor an ideologue.

Eroding Support, Increasing Anxiety

According to the Latinobarometro, market policies have indeed lost support in the region, particularly among the wealthier respondents who were once their strongest backers. Yet a close look suggests that our alternative interpretation is also at play: respondents support markets and democracy in theory but are more critical of how they are working in their own country.

The simplest story is that support for privatization—never great—has dropped. In 2000, 38 percent of survey respondents agreed that privatization had been beneficial for their country; in 2002, that figure fell to 32 percent.

Worries about unemployment are on the rise. The share of poll respondents who were very concerned about losing their job rose from 46 percent in 2000 to 58 percent in 2002, while the share who were not at all concerned fell from 13 percent to 9 percent. Women tended to be more fearful of losing their jobs in 2002 than were men, as were younger and less wealthy respondents, private employees, and those who did not have high expectations for their children.

A More Complex Picture

Support for other market reforms offers a more complex picture. Most respondents back specific market policies, such as trade and the role of the private sector. Using an index that reflects respondents' promarket attitudes, we find Latin Americans in 2002 to be as supportive of market reforms as they were in 2000 and 2001, with this support being strongly and significantly linked to wealth and education. More educated Latin Americans are less likely to be satisfied with the way the market works, yet more likely to be supportive of specific market policies.

In 2002, respondents at the higher end of the income scale, as expected, offered stronger support for market policies such as free trade, the private sector, and privatization. Yet a more subjective question—whether respondents were satisfied with how the market economy works in their country—did not elicit the expected linear relationship with wealth. Simply put, only the very wealthiest are satisfied with how the market is working.

That satisfaction with market policies has declined among middle-income respondents is in keeping with earlier research on the effects of market policies on the middle class. Market reforms tend to help people at the top of the income distribution by liberalizing trade and capital flows and those at the bottom by stabilizing inflation, but offer those in the middle a much more mixed experience. College-educated and private-sector employees tend to fare better; less educated and public-sector workers, worse.

Before Latin America's turn to the market, a secondary education guaranteed a stable and relatively "privileged" middle-class lifestyle—often with a job in the public sector. Today public-sector jobs are fewer and less desirable. Rewards now go to highly skilled workers, who are in short supply. Not surprisingly, public-sector workers are less likely than other respondents to support market policies.

As expected, respondents who are optimistic about their future prospects are much more likely to be promarket than other respondents. They also tend to be wealthier and more educated than average, to place themselves to the right on a left-right political scale, and to believe that the distribution of income in their country is fair. Respondents who are optimistic about their children's prospects also tend to be wealthier and more politically conservative than average, as well as more likely to be satisfied with how the market is working. They are also more likely to be optimistic about their country's future economic situation, even if they are not satisfied with its current situation, most likely reflecting hope, optimism, and other behavioral traits.

Changing Attitudes among the Wealthy

A Latinobarometro question asking if taxes should be lowered even if welfare and other state services suffer elicits another story. Surprisingly, respondents willing to give up state services for lower taxes do not tend to be wealthy or highly educated. They do, however, tend to be private employees and on the right on the political scale. They also tend to be optimistic about their future prospects—though, interestingly, not necessarily about their children's. One interpretation of this finding is that when people think in terms of their own income, they want lower taxes, but as they think about their children's future, they may be more concerned with the public services that taxes provide. Interestingly, those who favor lower taxes have, on average, a higher fear of unemployment.

These findings too suggest that wealthier, more educated, and presumably more secure people seem to be attributing higher value to the role of government and social welfare spending than they once did, while those in a more precarious situation do not seem to have faith in the government's ability to do anything about it—a logical expectation given the current state of government social insurance in much of the region.

What do respondents think about the fairness of income distribution in 2002? Only 13 percent think it is fair or very fair. In a remarkable departure from the past, respondents who take that position are not wealthier, on average. Nor do they tend to be well educated. Unsurprisingly, those who find the current income distribution fair tend to believe taxes should be lower regardless of the trade-off, and have higher expectations for their children's future.

Support for free trade comes from wealthier, more educated people and from skilled workers, who have benefited more than unskilled workers from the opening to free trade and freer capital flows. Rather surprisingly, unemployed respondents tend to favor free trade, presumably because they think it will increase job opportunities—a view that the jobless in the advanced industrial economies are unlikely to share. Respondents who are strongly promarket, who favor lower taxes, and who place themselves on the right of the political spectrum also tend to favor free trade. Those who think the distribution of income is fair are less likely to favor free trade.

In sum, support for market policies in the region has changed over the past several years. Support among middle-income respondents has declined. Support for privatization has fallen, and fear of unemployment has grown. A positive trend, however, is that wealthier respondents may be recognizing the importance of the role of government and welfare policies. The shift may be a result of self-interest rather than enlightenment, particularly given the regressive nature of public spending in the region, but it is still a first step, one that may provide a basis for crafting the sustainable and domestically financed social contracts that the region has long sorely needed.

Implications for Governance

Surprisingly, the share of Latin Americans who favor democracy over any other system of government is growing despite deteriorating economic conditions. Although it fell from 64 percent in 2000 to 55 percent in 2001, it rebounded in 2002 to 64 percent. The share of those who would accept an authoritarian government "under certain circumstances" has also fallen—from 22 percent in 2001 to 17 percent in 2002. The overall trends since 1996, when the survey began, have been slightly negative, which is not surprising because expectations for both reform and the democratic transition were still high at that point, and overall economic performance since has been poor.

Trends vary by country. Remarkably, given the severity of the crisis in Argentina, more Argentines prefer democracy this year than last—a large vote of confidence for democracy under extraordinarily difficult economic circumstances. In some countries, such as Brazil and Colombia, trends are less positive.

One positive trend is that Latin Americans seem to be moving in the direction of the advanced industrial democracies in terms of distinguishing between the poor performance of governments and the system of governance. Although generally supportive of democratic government, they are much more critical of the performance of their own governments—and political parties—in terms of issues like corruption. We find a marked difference, as we have in the past, between the determinants of respondents' satisfaction with the way democracy is working and those of their preference for democracy over any other system.

Respondents who prefer democracy tend to be well educated, but not necessarily wealthy (though wealthier people tended to prefer democracy in 2000). Students also tend to express a preference for democracy, as do those who have positive expectations for themselves and their children. The preference for democracy by the latter suggests a virtuous circle that could be strengthened by effective public policy in areas such as education. Less encouraging is that in 2002, those who favor promarket policies tend not to prefer democracy.

Happier people were also more likely to prefer democracy in 2002. In 2000, by contrast, there was no significant link between happiness and preference for democracy. Happiness was linked with satisfaction with how democracy works in 2000, though the direction of causality is not clear. Happier people may assess whatever system of government they happen to live in more positively than less happy people.

The portrait of those who are satisfied with how democracy works is changing. In sharp contrast to 2000, when the more well-to-do were strongly and consistently satisfied with democracy in practice, today the wealthy and middle class are more critical. More educated people also tend to be critical, as they have been in the past. Self-employed and unemployed people do not tend to be satisfied with democracy in practice. Those who approve democracy's workings tend to favor market policies, are happier, trust others, and have high expectations for their own and their children's future.

Corruption Remains Major Issue

Corruption features strongly in respondents' criticisms of both democracy and the market. Those who have been a victim of corruption tend not to be satisfied with democracy, though their experience does not affect—interestingly—their preference for it over all other systems. Those who have known an act of corruption are also much less favorably inclined to the market.

In general, poll respondents think corruption is a big problem. A large majority in all countries (the most in Argentina) think that corruption is becoming ever more serious. Men, as well as wealthier and more educated people, are most likely to have witnessed a corrupt act. People with high expectations for their own and their children's future were less likely. Women, on the other hand, were more likely than men to believe that corruption had increased, as were those who believed that taxes should be low regardless of the trade-offs. Those with high expectations for their children's future, those who trusted others, happier people, and those to the right on the political spectrum were more likely to believe that corruption had fallen.

Political activism, according to the 2002 poll, tends to enlist younger people, as expected, as well as more educated and more left-leaning respondents (but not those who regard the distribution of income as unfair) and those who have experienced an act of corruption. Respondents' wealth and their propensity to political activism were not linked—surprisingly, given the common assumption that deprived people are likely to be dissatisfied with their situation and therefore more willing to protest. One explanation is that attitudes among the wealthy are changing. Another is that upwardly mobile respondents in the middle and lower middle class are more likely to express dissatisfaction than are the poor, partly because they are more likely to know how the very wealthy live and to be more concerned about relative income differences, partly because the poor tend to have less free time to participate in politics. Political activism does not attract happier people, those with high expectations for themselves and their children, or those who prefer democracy to any other system.

What Lies Ahead?

Contrary to the myriad predictions of a looming backlash against reform, our findings suggest cautious optimism. Subjective well-being in the region has indeed declined, particularly in the crisis countries. Given the strong links between positive well-being and support for markets and democracy, the decline is cause for some concern. That said, most respondents distinguished clearly between the performance of particular governments and that of democracy as a system of government, with support for democracy actually increasing. Similarly, respondents distinguish between market policies and the way the market is working.

On the other hand, support for market policies in the region declined, especially among middle-income respondents, as did support for privatization. Corruption features strongly in respondents' criticisms of democracy and the market, and those who had witnessed a corrupt act seemed more inclined toward political activism.

Despite our appeal for guarded optimism, these developments are real causes for concern. Middle-class frustrations, along with the entrenched corruption and inequality that are widespread in the region, have the potential to cause unrest. The middle classes find themselves more vulnerable after market reform, and the poor see very slow returns. Adding to the reform animosity is the perception that the region's already high inequality is being exacerbated as those with human and financial capital see greater returns to their assets.

Recent events demonstrate the loss of public patience. In Bolivia an unexpected popular uprising against the reform-minded government of President Sanchez de Lozada led to the resignation of his entire cabinet. Strikes and protests against privatization and adjustment programs in El Salvador, Nicaragua, and Ecuador have turned violent.

It is a critical moment for U.S. policymakers to work to sustain Latin Americans' faith in markets and democracy by following through on important policy commitments, such as to the international financial institutions, to free trade and opening its markets to Latin American producers, and to foreign assistance commitments in the case of the poorest countries. The U.S. administration must also remain a strong proponent of democratic government in the region. Its initial support for the April 2002 coup against Venezuelan President Hugo Chavez, for example, eroded its credibility in the region, hence weakening its influence in resolving the current crisis there. The administration needs to recognize this and support, not intervene in, the region's fragile democracies.