Happiness and Economics: How the Economy and Institutions Affect Human Well-Being

CHAPTER 8 Constitution: Popular Referenda and Federalism

Chapter 8 CONSTITUTION: POPULAR REFERENDA AND FEDERALISM 8.1 Introduction People’s happiness is influenced by the kind of political system they live in. It is to be expected that people in constitutional democracies are happier because the politicians are motivated to rule according to their citizenry’s interests. If they disregard the wishes of the population , the politicians and parties in a democracy fail to be reelected and lose their power. Democratic institutions—in particular, the right to participate in elections and vote on issues—thus contribute to citizens’ happiness via a favorable outcome of the political process. Section 8.2 of this chapter discusses various relationships between democratic systems and subjective reported well-being. Section 8.3 focuses on a quantitative analysis of the effects on happiness of two particular constitutional devices: direct political participation of the citizens via popular referenda and federalist decentralization. Section 8.4 offers conclusions. 8.2 Constitutional Democracy and Happiness A constitution lays down the basic rules or fundamental institutions according to which the political system is supposed to be run. Examples are  The extents of human rights and property rights.  The extent to which the state is centralized or decentralized.  The way the citizens’ votes determine the people and parties elected into parliament (for example, proportional versus majority voting). 134 CHAPTER 8  Whether the government is directly elected by the voters or depends on the will of the parliament.  The extent to which the citizens have a direct say on particular issues. Over recent years, economists have made a great effort to empirically analyze the possible effects of democracy on economic factors. It has been shown that economic growth is supported by well-developed property rights. If economic freedom is considered more generally, the link to economic growth depends on the measure used. Many researchers hypothesize that democracy positively affects economic growth. However, there is no clear evidence that the extent of democracy fosters economic development. Some studies find that countries that democratize grow faster, while those that become less democratic grow more slowly than comparable countries. There is also evidence that a severe lack of democracy indirectly reduces growth via lower investments. More important for growth is how the democratic rules are implemented. Thus, government instability, political violence and unrest, and policy volatility indeed tend to hamper growth. (For crosscountry growth analysis, see, e.g., Barro 1997, Dasgupta 1993, de Haan and Sturm 2000, Minier 1998, or Siermann 1998.) Political and civil liberties are also evaluated with regard to the distribution of income. It has, for example, been shown that democracies pay higher wages. In a combined cross-section time series analysis, the level of manufacturing wages has been shown to be robustly higher in countries with extensive democracy. Average wages in Mexico would increase by 10 to 40 percent if that country had a level of democracy comparable to that in the United States (Rodrik 1999). Researchers on happiness have taken a further step and have looked at the interaction of democracy with happiness. The extent to which a constitution is democratic and allows its citizens to make decisions according to their own preferences can be captured by various indices of freedom. Figure 8.1 presents a graphical representation of a comprehensive measure of freedom, combined with a four-item measure of happiness, in 38 nations (mainly developed ones) at the beginning of the 1990s (Veenhoven 2000a). A visual test reveals that freedom (horizontal axis) and happiness (vertical axis) are positively related. The comprehensive index of the constitutional setup used in this figure has been captured in three areas: (a) Political freedom measures the possibility of citizens to engage in the democratic process or, conversely, the restrictions on political POPULAR REFERENDA AND FEDERALISM 135 2 2.5 3 3.5 -3 -2 -1 0 1 2 Economic, political and personal freedom Happiness Figure 8.1. Freedom and happiness across nations. Veenhoven (2000a), Appendix 1. participation. It is composed of two subindices, the first relating to civil rights, such as freedom of speech (with 11 items), and the second to political rights (9 items). (b) Economic freedom measures the opportunity of individuals to engage in the free exchange of goods, services, and labor. It is based on subindices (each in turn composed of a number of items), referring to the security of money, free enterprise, freedom from excessive taxation, and the possibility of undertaking monetary transfers. (c) Personal...