Declining happiness experienced despite growth and prosperity

Awan Wibowo Laksono Poesoro, Jakarta

Under the Old Order of Sukarno, economic development was somewhat neglected. Only after Soeharto's New Order seized power in 1966, it began to be given serious attention.

In an effort to resurrect the country from economic decline, the Soeharto regime adopted a growth-oriented development strategy. At the heart of the strategy was the promotion of the market economy, as recommended by a cadre of Western-trained scholars. While the New Order is now history, its development approach is still used by subsequent governments, including President Susilo Bambang Yudhoyono's administration.

Through the market economy, according to classical economics, people engage in productive undertakings and satisfy most of their needs via trade made possible by "the invisible hand"; namely, the price system.

This system coordinates decision making through the hands of a multitude of producers and consumers in a cloud of interrelated markets, allocating resources efficiently and bringing the highest benediction to the society. Through the system, transactions (with money, or price, as a measure of subjective value) occur and are measured as national income -- commonly represented by gross domestic product (GDP).

Has the growth-oriented development strategy actually raised the level of happiness -- satisfaction, if you will -- of the people? Unfortunately, it has not. It turns out that the market economy has some limitations.

First, only in perfect competitive markets, prices sufficiently represent subjective values. Meanwhile, perfect competitive markets are in fact rare. In Soeharto's days, perfect competitive markets were hardly in existence due to privileges granted by his government to certain companies that resulted in the emergence of a host of imperfect markets. Therefore, the market failed to generate the highest benefit, as resources were allocated inefficiently.

Second, not all needs are met via exchanges in markets. Public goods like roads and sewers -- as well as public services like electricity -- are some examples. Acutely corrupted provision mechanisms of public goods and services -- not to mention depraved bureaucracies -- in this country have aggravated this second limitation by making government budgets swell, pushing efficiency away.

As a result, embezzlement and bribery have become common practices, regardless of the regime in office. Debauched bureaucrats have been the central part of this chronic problem. The latest examples are the bribery allegations involving billions of rupiah against members of the General Elections Commission (KPU), including its head and secretary-general, as well as the corruption charges laid against several directors of Bank Mandiri.

Third, the genuine origins of happiness are often considered third-party effects, or externalities; that is, good or bad effects on actors indirectly involved in the production and consumption activities of the market, with pollution being one common example.

Meanwhile, examples of externalities that become sources of happiness are good health, a good family life, happy marriages, employment, work security, a promising career path, work utility, work enjoyment, leisure and even the honing of skills. These externalities are overlooked because producers regard them as costs, whereas goods and services are seen as revenue and profit.

The developed countries' experiences show that if a country managed to cope with problems arising from the first and second limitations of market economy, it would still face difficulties in increasing the level of happiness (the data on which can be found in social surveys containing happiness indicators, like the World Database of Happiness), as long as problems stemming from the third limitation have not been resolved.

The U.S. witnessed flagging levels of happiness, in spite of the increasing levels of national income, from 1971 to 1996. Meanwhile, happiness did not change much in Japan between 1958 and 1996 although the country experienced unprecedented GDP per capita growth (63 percent per decade).

We should, by now, realize that to boost the level of happiness, a mere growth-oriented strategy that results in an increased level of income is not adequate. A growth-oriented approach is only a necessary condition for the enhancement of happiness. Meanwhile, what is needed is improvement in things that are epochal but regarded as externalities.

It is true that improvements in income will raise happiness to a certain level. But beyond this threshold, the absence of improvements in externalities will make happiness flat or even subside, as expectations and values are no longer the same. These thresholds may vary across countries, depending on the cultural, social, political, and economic conditions of each country.

Have we been on the right track? Records show that the growth- oriented strategy was surely successful in improving income. The average Indonesian only received an income of US$55 per capita in 1969. Meanwhile, he/she received $1000 in 1996. But, these increases did not truly represent subjective values of the people, as they were mostly formed in imperfect markets.

Moreover, labor market externalities like unpleasant working conditions made many Indonesians far from happy. Indonesia was notorious for factories with bad working conditions, widely known as the sweat shops, in which workers' safety -- let alone comfort -- was elided.

The multidimensional crisis in 1997, with its concomitant social unrest and conflict, should be regarded as a telltale sign that happiness was at a fairly low level. In the reform era, problems from the three limitations of the market economy persist even though there has been some improvement, with the third limitation being the least improved.

The recovery of unemployment, in which the economic crisis recovery has not been accompanied by the creation of sufficing employment opportunities (the unemployment rate is about 9.5 percent), proves that externalities are still a major concern, revealing that producers still prefer capital-intensive industries over labor-intensive industries as they consider employment as a mere cost.

The government -- and producers alike -- have to realize that improvements in externalities will heighten the people's productivity, which will in turn increase the level of national income. Meanwhile, a lack thereof will put constraints on productivity, as well as happiness.

Instead of merely pursuing income growth, the government should espouse a revised development strategy that justly combines growth and the enhancement of externalities. At the end of the day, what is good about being rich if we do not live happily to enjoy it?

The writer is a researcher at the Indonesian Institute and a graduate of the University of Southern California. He can be reached at awanindonesia@yahoo.com.