Download aamir - Gross national happiness

PAKISTAN
WWW.SPDC.ORG.PK
Mohammad Shahbaz & Naveed Aamir
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Introduction
 The particular pioneering endeavor explores the impact of macroeconomic factors
that influence the happiness of poor individuals of society in case of developing
economy like Pakistan.
 There is no particular literature relevant to our study but some studies explain the
happiness decreasing factors in the society.
• Several studies found that current happiness of whole society influenced through
economic growth of previous period directly and indirectly [Pollak, (1970); Eastern,
(1974); Veenhoven, (1993); Clark and Oswald, (1994); Winkelmann and
Winkelmann, (1998) and, Diener and Biswas-Diener, (1999)].
• Easterlin (1974) explained “Happiness scores carry no meaning, they are not
comparable across people, people redefines their happiness scores over time,
happiness should depend on health, environment, leisure and variables other than
income”. Happiness is more a qualitative and subjective matter; nevertheless, it is
not absolutely impossible to translate it into quantitative terms. No doubt, it keeps
on changing with time and perception.
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 Blanchflower and Oswald (1997) explain the effects of unemployment on happiness
and find strong negative effect not only in western countries but also transition
countries. While, Veenhoven (1996) points out that there is usually a high positive
correlation between satisfaction and education in low-income countries.
• Moreover, in poor countries with higher rate of inflation poor people tend to show
lower levels of well being than the rich people as inflation always hurts the people of the
lower bracket. Especially in the emerging market economies, macroeconomic trends
have quite a significant effect on individual’s life satisfaction reflecting level of
happiness. Thus, the process of reforms must stabilize higher levels of inflation (Shahbaz,
2007).
• Trade-openness route is a very important mechanism to enhance the level of happiness
of poor individuals in world because it not only tend to improve the incomes but also
provide some additional resources in order to overcome the issue of poverty and hence
raise the utility level [Winters, (2000); Nicolas, (2001) and David and Scott, 2005)].
Relevant literature reveals that a mixture of export-promotion and import- substitution
policies can help a state to manage its poverty better that raises the happiness of poor
segments of population in the society, rather than a solely inward or outward looking
policy, since the states that have adopted either of these two (or both) policies have
done to improve the happiness of poor compared to the other factors.
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 Another argument in favor of the beneficial effects of trade to raise the happiness
level of deprived segment is put forward by Bhagwati and Srinivasan (2002); who
pointed out that if a country wants to rely on free trade, it must maintain a
framework of macroeconomic stability. Because stability implies low inflation, it is
another channel through which trade influences the happiness of poor positively,
since the satisfaction of poor tends to be hardest hit by high inflation (Bardhan,
2004).
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B. METHODOLOGY
We employ Modified Auto Regressive Distributive Lag Model to
investigate long run relationship and Error Correction Model for
short run association using the bound testing.
 The first advantage is that it can be applied
irrespective of whether underlying regressors are
purely I(0), purely I(1) or mutually co-integrated
(Pesaran and Pesaran, 1999).
 The second advantage of using the bounds testing,
it performs better than Engle and Granger (1987),
Johansen (1990) and Philips and Hansen (1990) Cointegration test in small samples (see e.g. Haug,
2002).
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 The third advantage of this approach is that, the
model takes sufficient number of lags to capture the
data generating process in a general-to-specific
modeling framework (Laurenceson and Chai, 2003).
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C. DATA PERIOD
Study utilizes annual time series data covering the period from
1973 to 2006. We have obtained data from World Development
Indicators (WDI, 2006), International Financial Statistics (IFS,
2006) and Economic Survey (various issues).
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D. Model Specification
To inquire the impact of macroeconomic Determinants on Poor’s happiness
following equation is being modeled;
LHN = α1 + α2LME + α3LRGDP + α4LINF
+ α5LTR + α6LFDI + α6LTAX + α7LREM
+ α8LURB + ηt
Where
HP = Happiness Index (Inverse of Head-count ratio),
RGDP = Real GDP per capita,
INF = Inflation proxied by CPI,
TR = Trade as share of GDP,
FDI = Foreign Direct Investment,
TAX = Tax revenue as share of GDP (Indirect taxes)
REM = Remittance as share of GDP,
URB = Urbanisation as share of total population,
ME = Macroeconomic Shocks
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Expecting signs
20, Macroeconomic shocks reduce the happiness of poor segments
of society through its direct and indirect channels. Frequent
macroeconomic shocks make satisfaction (happiness) of poor sluggish
(Sawhill, 1988; Steven, 1999) because happiness persists at
household level.
3 > 0, RGDP is assumed to have a positive impact on happiness of
poor individuals. A one-year lag of RGDP is used because it takes
some time before the above-described process to work out.
4 > 0, “Inflation is the cruelest tax of all” it is often explained as that
inflation which hurts the poor more than the rich through direct and
indirect channels. The impact of inflation on happiness of poor
segments of society is inversely correlated i.e. impact of inflation
worsens the situation of poverty in the economy and obvious levels of
happiness of poor.
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5>0, Trade-openness enhances the happiness of bottom 20 %
population through consumer surplus and export oriented
policies alongwith improvement in productivity by adopting the
new technologies.
6>0 or 6<0, The effects of foreign direct investment on poor’s
happiness depend on the policies of the country but in the case
of developing country like Pakistan it has large potential to
increase happiness of poor through reduction in poverty levels
from foreign direct investment.
6<0, Indirect taxes decline the levels of poor’s happiness. More
indirect tax means more inflation, which hurts the poor
inhabitants more as compared to rich individuals.
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7>0, Urbanisation improves the happiness levels of poor
segments of population through the provision of employment
opportunities.
8>0, Enhancement in remittances will stimulate the village
economy and provide employment to un-skilled labour
belonging to poor segments, as a result, utility level increases.
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30
20
10
0
-10
-20
R
LU
B
AX
LT
R
LT
EM
LR
F
N
LI
DI
LF
P
D
LG
E
LM
N
LH
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D. Interpreting Style Construction
The results for the Unit Root Test, MARDL Test and OLS estimation of linear model, and ECM with short run diagnostic tests are given in
Table 1, Table 2, Table 3, and Table 4. Now, I am going to show you the results one by one.
Table-1
Unit Root Estimation
Variables
DF-GLS Test
KPSS-Test
Level
1st Difference Level
1st Difference
LHN
1.380
-3.235**
0.2340
0.1295***
LME
-2.065
-5.927***
0.2417
0.1183***
LGDPC
-1.824
-4.916*
0.2692
0.0728*
LTRADE
-3.508**
-3.018***
0.0509*
0.0515*
LCPI
-0.674
-2.900***
0.2939
0.1126***
LRIMT
-1.882
-3.616**
0.2325
0.1396**
LFDI
-2.766
-3.236**
0.2747
0.0348*
LURB
-1.845
-3.833*
0.5153
0.0809*
LTAX
-2.525
-7.153*
0.3170
0.0644*
Note: * (**) *** representing significant at 1% (5%) 10% level of significance.
Unit Root Estimation shows that all running actors in the model except trade-openness are having 1st order of Integration.
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Table-3
MARDL OLS Regression Results
Dependent Variable: LHN
Variable
Co-efficient
t-values
Inst-values
Constant
0.4560
1.719
0.0990
LME
-1.0182
-71.912
0.0000
LGDP(-1)
- 0.0800
-2.736
0.0118
LINF
- 0.0442
-3.680
0.0012
LTR
0.1075
5.544
0.0000
LREM
0.0145
6.258
0.0000
LTAX
- 0.0774
-2.512
0.0194
LFDI
- 0.0048
-1.244
0.2259
LURB
0.0124
0.274
0.7865
R-squared = 0.99914
S.E. of regression =0.0074
Log likelihood = 116.6737
Durbin-Watson stat = 2.167*
Adjusted R2 = 0.99884
Akaike criterion =-6.7296
Schwarz criterion =-6.3173
F-statistic = 3358.883
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Table-4
ECM Version of MARDL Approach
Dependent Variable: ΔLHN
Variables
Co-efficient
Std. Error
Inst.value*
Constant
0.0023
0.0033
0.5035
ΔLME
-1.0401
0.0254
0.0000
ΔLINF
-0.1148
0.0379
0.0067
ΔLGDP(-1)
0.0628
0.0305
0.0530
ΔLFDI
-0.00023
0.0022
0.9195
ΔLREM
0.0086
0.0031
0.0106
ΔLTAX
-0.0401
0.0194
0.0519
ΔLTAX(-1)
0.0443
0.0184
0.0255
ΔTR
0.0721
0.0117
0.0000
ΔLURB
0.1377
0.0339
0.0006
ECT(-1)
-1.4081
0.2084
0.0000
R-squared = 0.99036
Adjusted R-squared = 0.98554
Akaike info criterion = -7.31181
Schwarz criterion = -6.80298
Durbin-Watson stat = 1.80616
F-statistic = 205.51
*Instability: Value means probability value or significance level.
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Sensitivity Analysis of short run (ECM) Model
Serial Correlation LM, F = 0.614 (0.44)
ARCH Test = 0.855 (0.85)
Normality J-B Value = 4.30 (0.12)
Heteroscedisticity Test, F = 0.529 (0.42)
Ramsey RESET Test, F =0.835 (0.79)
Figure-2
Plot of Cumulative Sum of Recursive Residuals
8
4
0
-4
-8
2001
2002
2003
CUSUM
2004
2005
2006
5% Significance
The straight lines represent critical bounds at 5% significance level.
Figure-3
Plot of Cumulative Sum of Squares of Recursive Residuals
1.6
1.2
0.8
0.4
0.0
-0.4
2001
2002
2003
CUSUM of Squares
2004
2005
2006
5% Significance
The straight lines represent critical bounds at 5% significance level.
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Conclusions & Policy Recommendation
The estimation of Poor’s happiness and its determinants show that happiness of poor
individuals is highly influenced from macroeconomics shocks prevailed in the economy.
Economic growth or rise in GDP per capita declines the level of Poor’s happiness due to
upper-echelon phenomenon in a long span of time in Pakistan.
Inflation influences the purchasing power of poor segments of population and definitely
affects the happiness negatively in both the periods.
Enhancement in remittances seems to push happiness or Poor’s welfare levels upward
significantly.
Increase in indirect taxes especially sales taxes is also associated with low levels of
happiness of poor individuals in a developing country like Pakistan.
Trade-openness improves happiness rankings of poor segments of population through
its direct & indirect channels.
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Finally, a low level of happiness is associated with low urbanization in a short span of
time.
The present endeavor indicates the need to improve trade-related infrastructure
because openness cannot serve as a reliable substitute for domestic development
strategy especially to lower levels of society. The government should pursue more
effective trade liberalization and trade-stabilization active policies to enhance the wellbeing of the disadvantaged segment in the country. The government should introduce
incentives to divert the foreign direct investment to Small manufacturing enterprises or
cottage based industries.
There is also need to improve the supply side of the economy to stop the detrimental
impacts of macroeconomic shocks to vulnerable groups. In order to bring the issue of
poverty reduction to the central stage of economic policy making, what is required is
the adoption of new approach for the allocation of funds to poor actors of the economy.
All this needs a realistic assessment of poverty for poverty reduction plan and obviously
to raise the happiness of poor segments of population.
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End
Take Care, Good Bye
and
Allah Hafiz
Mohammad Shahbaz & Naveed Aamir
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