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Happiness, Markets, and Democracy: Latin America in Comparative Perspective

Carol Graham and Stefano Pettinato

Abstract

The literature on subjective well being highlights the role of relative income differences, an issue which is particularly salient for the emerging market countries. We explore the demographic determinants of happiness in 17 countries in Latin America, as well as the effects of macroeconomic trends and attitudes about the market on happiness. We provide comparative reference with data from Russia and the United States. We find that the determinants of happiness in Latin America are remarkably similar to those in the advanced industrial countries. We also find a marked and negatively skewed perceptions gap between individuals’ objective economic situations and their subjective evaluations in both Latin America and Russia. That gap, in turn, has negative effects on happiness. Inflation and unemployment have negative effects on happiness in both contexts, while pro-market attitudes and preference for democracy have positive effects.

The working papers represent drafts that have been internally reviewed but are not official publications of the Institution.

Introduction
 
One of the most fundamental objectives of public policy is to enhance the welfare of as many people as possible, within a given set of resource constraints. Yet academic and public policy debates rarely address the question of what determines improvements in welfare or in life satisfaction. Economists, in contrast to psychologists and sociologists, have traditionally shied away from subjective data on life satisfaction. Most economic models assume that wealth and utility are virtually synonymous. Yet research by both economists and psychologists on life satisfaction or “happiness” finds a seeming paradox that challenges that assumption: aggregate levels of life satisfaction do not increase as societies grow wealthier, even though within countries wealthier individuals are, for the most part, “happier” than poorer ones.

These findings highlight the importance of relative rather than absolute differences in wealth, particularly after societies cross a certain absolute level of income. This by no means discounts the fundamental importance of economic growth in reducing poverty and attaining a wide range of other development objectives. Yet it does suggest that factors other than income growth affect individuals’ assessments of their own welfare, and that these same factors may influence their responses to incentives and policies.

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