Well-Being of Society: The Role of Institutions vs. Government Expenditure

Abstract

In this paper we attempted to analyze the determinants of country level human development. Since the human development index is a better indicator of people's well-being than GDP per capita we argue that effectiveness of government policies should be judged in terms of their contribution to human development. By using a large panel dataset obtained from various sources we analyzed the effects of government expenditures and the level of economic freedom on human development. The results provide strong support for the hypothesis that higher level of economic freedom is positively related to higher level of human development. Economic freedoms are especially important in countries with low level of human development. On the other hand, we failed to find evidence for government expenditures' effect on human development. Overall, our results indicate that a country's institutional framework, especially those that are related to economic freedoms, have a significant effect on people's well-being and development.