Happiness in developing countries: can government competitiveness substitute for formal institutions?

Abstract

Accumulated empirical studies have examined how various qualities of governance affect happiness across countries. This study contributes to prior studies by testing a hypothesis that when developing countries lack effective legal and political institutions, capable government may substitute for their functions to promote happiness via effective policy planning and implementation. To test this expectation, this study compares which qualities of governance—government capacity, democracy, and legal system—matter for happiness in developing countries. While prior studies have overwhelmingly relied on the World Governance Indicator to measure government capacity, we introduce a new measure—government competitiveness—developed by the Center for Government Competitiveness, which overcomes some criticisms. Using this indicator, we employ pooled Ordinary Least Square and two-way fixed effects panel data analysis for 80 non-Organization for Economic Cooperation and Development countries spanning the years 2015–2018. As a robustness test, we conduct instrumental variable estimation, using geography as an instrument for government competitiveness. Our analysis shows that government competitiveness has a positive and statistically robust effect on happiness across all estimations, while quality of democracy and judicial independence display ambivalent effects. Our instrumental variable results suggest that judicial independence and quality of democracy display a substituting and complementing relationship with government competitiveness, respectively.