Gumede, Ru h T.; G eyling, Lo aine; Mazo odze, B ian T.
A icle
The impac o go e nmen spending on well-being: a
case o uppe middle-income coun ies and high-income
coun ies
Cogen Economics & Finance
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Sugges ed Ci a ion: Gumede, Ru h T.; G eyling, Lo aine; Mazo odze, B ian T. (2024) : The impac o
go e nmen spending on well-being: a case o uppe middle-income coun ies and high-income
coun ies, Cogen Economics & Finance, ISSN 2332-2039, Taylo & F ancis, Abingdon, Vol. 12, Iss. 1,
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The impac o go e nmen spending on well-
being: a case o uppe middle-income coun ies
and high-income coun ies
Ru h T. Gumede, Lo aine G eyling & B ian T. Mazo odze
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DEVELOPMENT ECONOMICS | RESEARCH ARTICLE
The impac o go e nmen spending on well-being: a case o uppe
middle-income coun ies and high-income coun ies
Ru h T. Gumede
a
, Lo aine G eyling
a
and B ian T. Mazo odze
b
a
Depa men o Economics, Facul y o Comme ce, Adminis a ion and Law, Uni e si y o Zululand, Richa ds Bay, Sou h
A ica;
b
School o Economic and Managemen Sciences, Sol Plaa je Uni e si y, Kimbe ley, Sou h A ica
ABSTRACT
The wel a e e ec s o go e nmen edis ibu i e policy ha e been subjec o conside -
able deba e o decades. Agains his backg ound, his s udy explo es he e ec o go -
e nmen social spending on an empi ically cons uc ed measu e o well-being in a
panel o 16 uppe middle-income coun ies and 38 high-income coun ies obse ed
be ween 2002 and 2019. The s udy u ilises he Gene alised Me hod o Momen s (GMM)
Model o es ima e he empi ical ela ionship be ween go e nmen social spending and
well-being. The esul s sugges ha wel a e gains in uppe middle-income coun ies a e
de i ed om edis ibu i e spending ha p io i ises schooling. On he o he hand, ich
coun ies a e mo e likely o bene i om heal h- ela ed spending. Based on he esul s
he s udy con i ms ha disagg ega ed social spending in uppe middle-income na ions
and weal hy na ions does no impac agg ega e well-being uni o mly. The e o e, e o s
o imp o e agg ega e wel a e h ough go e nmen edis ibu i e spending ough o
conside hese a endan he e ogenei ies.
IMPACT STATEMENT
This s udy examines he associa ion be ween go e nmen social spending and well-
being using a panel da ase o 54 uppe middle-income and high-income coun ies.
The no el ea u e o his in es iga ion is embedded in he cons uc ion o he agg e-
ga e well-being index. We employed he P incipal Componen s Analysis (PCA) ech-
nique o build a composi e well-being index. This well-being indica o inco po a es
age dependency, access o wa e , access o sani a ion, and li e expec ancy, he ins i u-
ional quali y is measu ed by ou indica o s which a e go e nmen e ec i eness, con-
ol o co up ion, poli ical s abili y and ule o law, en i onmen deg ada ion (CO2
emissions) and economic g ow h (GDP). This app oach is expec ed o con ibu e sub-
s an ially o he sca ce li e a u e in he ield o well-being in uppe middle-income
coun ies and highe -income coun ies. A ocus on well-being esea ch is impo an
since imp o ed well-being leads o a be e quali y o li e and s imula es economic
pe o mance h ough i s in luence on human de elopmen . The indings sugges ha
wel a e gains in uppe middle-income economies a e a ibu ed o social spending
ha p io i izes educa ion. In con as , weal hy coun ies a e mo e likely o bene i
om heal h- ela ed spending. Policymake s should de elop edis ibu i e policies ha
add ess he speci ic needs o each egion since e idence demons a es ha disagg e-
ga ed social spending in uppe middle-income coun ies and weal hy na ions does
no in luence agg ega e well-being uni o mly.
ARTICLE HISTORY
Recei ed 30 June 2024
Re ised 20 Sep embe 2024
Accep ed 2 Oc obe 2024
KEYWORDS
Well-being; go e nmen
spending; educa ion; heal h;
Sys em GMM
SUBJECTS
Economics; Economics and
De elopmen ; Poli ical
Economy
JEL CODES
I18; I25; I31
1. In oduc ion
Fiscal policy is pa o he oolki ha go e nmen s employ o achie e hei mac oeconomic objec i es
(Mankiw, 2010). In he Keynesian school o hough , iscal policy can s abilise cyclical luc ua ions in ou -
pu and employmen in he sho un. This unde s anding has mo i a ed a s and o empi ical esea ch
p obing he economic e ec s o iscal policy (Chipaumi e e al., 2014; Chude & Chude, 2013; Odhiambo,
CONTACT Ru h T. Gumede [email p o ec ed],[email p o ec ed] Depa men o Economics, Facul y o Comme ce,
Adminis a ion and Law, Uni e si y o Zululand, P i a e Bag X1001, KwaDlangezwa 3886, Richa ds Bay, Sou h A ica.
ß2024 The Au ho (s). Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/licenses/by/4.0/), which
pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed. The e ms on which his a icle has been
published allow he pos ing o he Accep ed Manusc ip in a eposi o y by he au ho (s) o wi h hei consen .
COGENT ECONOMICS & FINANCE
2024, VOL. 12, NO. 1, 2413657
h ps://doi.o g/10.1080/23322039.2024.2413657
2015). Howe e , iscal policy also acili a es he edis ibu ion o income. The p ima y objec i e o edis-
ibu i e policies is o ad ance he wel a e o he socie y. Redis ibu i e p og ams ad oca e o equali y
by o e seeing he ans e o esou ces om he weal hy class o he less p i ileged people. The e o e,
building on he ounda ion o he egali a ian school o hough which encou ages equali y among peo-
ple. The concep o well-being can be obse ed om wo di e en pe spec i es, objec i e and subjec i e
iewpoin s. The subjec i e app oach deals wi h non-economic cha ac e is ics o well-being. The subjec -
i e app oach desc ibes people’s assessmen o hei li es, especially hei con en men wi h hei li es.
In con as , objec i e well-being cap u es ma e ial esou ces ha signi ican ly de e mine he basic needs
o households, such as dis ibu ion o income, household consump ion, employmen , expendi u es e c.
The well-being concep is essen ial and equi es mo e a en ion since imp o ed well-being no only
p omo es he quali y o li e bu also s imula es economic g ow h h ough he human de elopmen
channel. In gene al, people wi h imp o ed well-being end o p og ess h ough he educa ion sys em
mo e smoo hly and highly p oduc i e a wo k han compa ed o hose wi h poo heal h and educa ion
ou comes. The eme gence o he endogenous g ow h pa adigm has highligh ed he signi icance o he
edis ibu i e componen s o iscal policy, which ha e been unde alued in he li e a u e. Acco ding o
his heo y, public in es men in he social sec o s (such as heal h and educa ion) p omo es human
de elopmen which is a signi ican ac o in sus ainable g ow h and well-being (Lucas, 1988; Rome ,
1990). In addi ion, he o mula ion o he Millennium De elopmen Goals (MDG) in 2000 also ein o ced
he impo ance o social policy in e adica ing ex eme po e y and ad ancing well-being (Uni ed
Na ions, 2015).
The e is a dea h o wel a e s udies, he majo i y o which ocus on he quali y o educa ion (yea s o
schooling and school en olmen ), heal h (li e expec ancy, mo ali y), income edis ibu ion (Gini coe i-
cien ), and economic g ow h ( eal GDP o GDP pe capi a) as indica o s o agg ega e wel a e (Ande son
e al., 2017; A hu & Oaikhenan, 2017; C aigwell e al., 2012; Ka im, 2015; Ndaguba & Hlo ywa, 2021).
A key challenge acing hese s udies is he complexi y su ounding he de ini ion and measu emen o
well-being. Recen ly, a oubling pa e n has eme ged whe e economic g ow h is associa ed wi h pe sis -
en inequali y and socio-economic issues, causing economis s o challenge he no ion ha economic
g ow h is he app op ia e indica o o agg ega e well-being. Consequen ly, he e a e g owing demands
o he de elopmen o new measu emen s which embody holis ic well-being.
To add ess he knowledge gap, his s udy explo es he associa ion be ween go e nmen social
spending and wel a e using a panel da ase o 54 uppe middle-income and high-income coun ies. The
indings will con ibu e o he sca ce li e a u e in e ms o edis ibu ion policy and well-being. The no el
ea u e o his in es iga ion is embedded in he de elopmen o he well-being index. To achie e his
uniqueness, he s udy will use he P incipal Componen s Analysis (PCA) echnique o build a composi e
well-being index. The PCA echnique in eg a es se e al cha ac e is ics in o a single indica o , hus
allowing o he inclusion o se e al signi ican well-being a iables in a single eg ession. Fu he mo e,
u ilising disagg ega ed go e nmen spending on educa ion, heal h and social p o ec ion has he ad an-
age o acili a ing you a ge ed iscal policymaking in e ms o disc e iona y decisions.
The emainde o he pape is a anged as ollows: Sec ion 2 ocuses on he li e a u e e iew, Sec ion 3
documen s me hodology (which co e s da a desc ip ion and es ima ion s a egy), and empi ical esul s and
discussion a e p o ided in Sec ion 4. The obus ness indings a e epo ed in Sec ion 5,while heconclusion
and policy ecommenda ion a e p esen ed in Sec ion 6.
2. Li e a u e e iew
Fo decades, economis s and policymake s ha e ocused on GDP as a composi e indica o o well-being.
Howe e , he no ion ha ‘income (GDP) is a be e indica o o well-being’has ecen ly been con es ed
by se e al economis s, a guing ha GDP is simply a subse o he complex concep o well-being (Ai ken,
2019; Decancq & Schokkae , 2016; S igli z e al., 2019). The Nobel lau ea e Ama ya Sen’s ea lie esea ch
played a majo ole in he de elopmen o he well-being indica o . Sen (1985) hus sugges ed ha when
economic g ow h indica o like GDP is u ilised as a p oxy o agg ega e well-being people’s eedoms a e
neglec ed. Acco ding o his amewo k, well-being can be cha ac e ised as a mul idimensional domain
ha looks a li e quali y and conside s non- inancial aspec s including leisu e ac i i ies, social in e ac ions,
2 R. T. GUMEDE ET AL.
and he s anda d o educa ion and heal h. Sen’s(1985) s udy led o he o ma ion o he Human
De elopmen Index (HDI) unde he Uni ed Na ions De elopmen P og amme (UNDP) in 1990.
The HDI measu ed li e expec ancy a bi h, GDP pe capi a, and educa ional a ainmen . Acco ding o
he Uni ed Na ions (UN), he h ee ac o s p omo e agg ega e well-being (Sh o yia & Singh, 2020). On he
o he hand, S igli z e al. (2019), B o
cek and Lalinsk
y(2017) and Jones and Klenow (2016) also analysed
he concep o beyond GDP. They a gued ha employing he w ong indica o o example, GDP as a
p oxy o agg ega e well-being could dis o he u h o how people a e a ing in he coun y and induce
he go e nmen o implemen i ele an policies. Acco ding o hese esea che s’well-being s udies mus
inco po a e income dis ibu ion, he quali y o educa ion, heal h- ela ed indica o s, en i onmen al changes,
and all ac o s in luencing he s anda d o li ing. Finally, schola s like Wiseman and B ashe (2008)and
A kinson e al. (2020) ha e de eloped a concep ual amewo k o communi y well-being ecen ly.
Acco dingly, communi y well-being is de e mined by mul iple domains (social, economic, poli ical, cul u al,
en i onmen al, e c.). These ac o s assis indi iduals and communi ies achie e hei goals h ough building
s ong social ne wo ks o ela ionships and p omo ing li eable and equi able communi ies.
When explo ing he well-being and he edis ibu i e aspec s o go e nmen policy i is impe a i e o
discuss he egali a ian school which seeks o add ess he inequali ies wi hin he socie y h ough he dis-
ibu ion o esou ces, and weal h and p o iding equal oppo uni ies o all ci izens. T adi ionally egali a -
ianism amewo k sugges ed ha he go e nmen should diminish he inequali ies o igina ing om
ex e nal ac o s while igno ing he inequali ies c ea ed by people’s decisions (Beng son & Lippe -
Rasmussen, 2023; Dwo kin, 1981). This no ion was opposed by some egali a ians who claimed ha peo-
ple who ha e made bad decisions a le o su e , hus an i he ical o he egali a ian pe spec i e whose
p ima y objec i e is o p omo e equali y o all ci izens. Egali a ianism should place mo e emphasis on
ela ional equali y a he han me ely equalising people’s ci cums ances. Rela ional equali y p oposes
ha in an egali a ian socie y, e e yone is awa ded he same undamen al igh s and ecei es equal ea -
men . Those who ad oca e o ela ional egali a ianism belie e ha he equali y concep is bes
explained by he ela ionships ha exis among people a he han he dis ibu ion o esou ces
(Ande son, 1999; Sche le , 2010). In a nu shell, he egali a ianism ideology aims o p omo e equali y
among people, which can be achie ed h ough imp o ing he condi ions o he less p i ileged, c ea ing
equal economic oppo uni ies, and ea ing e e yone equally.
Mel ze and Richa d (1981) p esen ed a majo i y- o ing model, whe e a highe le el o income
inequali y leads o highe edis ibu ion e o s. Mos people end o p e e a go e nmen ha edis ib-
u es capi al om he weal hy g oup o he unde p i ileged g oup when he popula ion ea ning mean
income is g ea e han hose ea ning he median income (Gumede e al., 2019). The Mel ze and Richa d
model is he ex ension o he median o e heo em ounded by Downs (1957). This sugges s ha in a
democ a ic coun y which adop s he majo i y ule, he o ing p ocess will choose he ou come ha is
mos popula wi h he median o e . The model is ocused on wo assump ions, The i s one is ha
democ a ic egime o e s can ca ego ise all op ions in o a single poli ical spec um. Secondly, he o e ’s
p e e ences a e single-peaked. O e all, he p e e ences o a median o e de e mine he size o he go -
e nmen expendi u es and axes.
F om an empi ical s andpoin , Haile and Ni~
no-Za az
ua (2018) sough o in es iga e whe he social spend-
ing s imula es wel a e in 55 low-income and middle-income economies wi h panel da a spanning om
1990 o 2009. Social spending was deno ed by educa ion, heal h, and social p o ec ion spending, while
agg ega e wel a e was p oxied by he inequali y-adjus ed human de elopmen index (IHDI), human de el-
opmen index (HDI), and child mo ali y a es. Thei esul s indica ed ha agg ega e social spending s imu-
la es wel a e in bo h low-income and middle-income coun ies. In he case o disagg ega ed social
spending, all componen s ha e a posi i e sign as expec ed, bu only he heal h spending es ima e p omo es
wel a e. F om a ime se ies app oach, Ndaguba and Hlo ywa (2021) e alua ed he ela ionship be ween go -
e nmen heal h expendi u e and well-being. The ARDL es ima es con i m ha heal h spending is posi i ely
ela ed o he human de elopmen index (HDI). Thus, in es men in public heal h s imula es well-being in
Sou h A ica. In ano he s udy, C aigwell e al. (2012) examined he impac o go e nmen educa ion and
heal h spending on economic g ow h and he quali y o li e using panel da a om 19 Ca ibbean coun ies.
The indings indica ed ha heal h spending boos ed li e expec ancy, while educa ion spending had a sig-
ni ican impac on p ima y and seconda y school en olmen . In addi ion o he abo e s udies.
COGENT ECONOMICS & FINANCE 3
A hu and Oaikhenan (2017) empi ically assessed he in luence o go e nmen expendi u e on well-
being in sub-Saha an A ica. They ound ha aising heal h spending p olonged li e expec ancy and mi -
iga es mo ali y a e. The s udy by Niehues (2010) e alua ed he e ec o go e nmen edis ibu ion
expendi u e on income inequali y u ilising panel da a om 24 Eu opean coun ies. The GMM indings
sugges ed ha social p og ammes dealing wi h unemploymen bene i s and social pensions na ow he
gap be ween he weal hy and he unde p i ileged. The wel a e s udy conduc ed by Ospina (2010)
e ealed ha public spending on educa ion and heal h p omo es equali y in La in Ame ica. Howe e ,
social secu i y spending p omo es inequali y.
Sami Saad (2024) panel esea ch explo ed he ole o public spending on inclusi e g ow h. Th ough
he p incipal componen analysis (PCA) he s udy compu ed he composi e inclusi e g ow h index which
ook in o accoun ac o s such as quali y educa ion and heal h, en i onmen sus ainabili y, and income
dis ibu ion. Based on he indings, go e nmen in e en ion h ough educa ion and heal h spending
aised inclusi e g ow h. A s udy by Amaluddin e al. (2018) sough o de e mine whe he a modi ied
human de elopmen index (HDI) cons uc ed using he PCA signi ican ly in luenced well-being in 33
Indonesian illages. Following he Uni ed Na ions me hodology, he modi ied HDI indica o eme ged
yea s o schooling, income pe capi a and li e expec ancy, while he po e y a e se ed as he depend-
en a iable. The ou come e ealed ha as human de elopmen ad ances, po e y declines, esul ing in
imp o ed well-being in Indonesia.
Based on he empi ical sec ion, i appea s limi ed s udies ha e explo ed he link be ween go e nmen
disagg ega ed social spending and agg ega e well-being, mos o which do no ea well-being as a
mul idimensional concep . Secondly, he men ioned s udies ha e neglec ed ins i u ional quali y,
al hough quali y ins i u ions play a signi ican ole in well-being and social policy. The es ablishmen o
sound ins i u ions s imula es inclusi e g ow h and well-being h ough educing ansac ion cos s, p o-
ec ing human igh s, honou ing con ac ual ag eemen s, ensu ing go e nmen s ope a e e ec i ely and
inally, minimising audulence ac i i ies. Thi dly, en i onmen al ac o s ha e been o e looked in wel a e
s udies. In ecen yea s clima e change has become mo e agg essi e, causing se e e damage o he
en i onmen and human well-being. Resea che s mus he e o e ake en i onmen al sus ainabili y in o
accoun when s udying well-being. To add ess he men ioned issues, we employ he P incipal
Componen s Analysis (PCA) echnique o build a composi e well-being index. This well-being indica o
inco po a es age dependency, access o wa e , access o sani a ion, and li e expec ancy, he ins i u ional
quali y is measu ed by ou indica o s which a e go e nmen e ec i eness, con ol o co up ion, poli -
ical s abili y and ule o law, en i onmen deg ada ion (CO
2
emissions) and economic g ow h (GDP).
The applied me hodology will con ibu e signi ican ly o he spa se li e a u e in he ield o well-being
s udies in uppe middle-income coun ies and highe -income coun ies.
3. Me hodology
To analyse he empi ical associa ion be ween go e nmen social spending and agg ega e well-being we
employed a panel da ase consis ing o 54 coun ies spanning om 2002 o 2019. The sampled econo-
mies a e ca ego ised in o 16 uppe middle-income coun ies and 38 high-income economies ollowing
he Wo ld Bank classi ica ion. Fu he mo e, he selec ion o he coun ies and he sampling pe iod we e
dic a ed by da a a ailabili y. The lis o selec ed na ions and he da a desc ip ion a e epo ed in he
Appendix sec ion, Tables A1 and A2, espec i ely. The seconda y da a was ex ac ed om he OECD
Social Expendi u e Da abase (SOCX), IMF Go e nmen Finance S a is ics (IMF-GFS), Wo ld De elopmen
Indica o s (WDI), Economic Commission o La in Ame ican and he Ca ibbean Coun ies (CEPALSTAT),
Wo ldwide Go e nance Indica o s (WGI) and he Eu os a Da abase.
3.1. Wel a e empi ical model
Guided by empi ical li e a u e (Haile & Ni~
no-Za az
ua, 2018), we es ima ed di e en a ian s o he ollow-
ing dynamic
1
model.
Wi, ¼
h
0Wi, −1þb1Ei, þb2Hi, þb3Si, þcXþgiþ þei, (1)
4 R. T. GUMEDE ET AL.
i¼1, ...,n; ¼1, ...,T
F om equa ion (1) Wi, deno es well-being; Wi, −1 ep esen s one pe iod lagged well-being, while i
indexes indi idual coun y and ime pe iod (yea ). b1,b2and b3a e he main pa ame e s o inqui y, meas-
u ing he impac o disagg ega ed social spending (educa ion, heal h and social p o ec ion, espec i ely) on
agg ega e well-being, On he o he hand, Xis a ec o o o he a iables ha a e likely co ela ed wi h well-
being (Wi, ) and p edic o a iables (Ei, ,Hi, and Si, ). The selec ed con ol a iables a e employmen in se -
ice sec o s (% o o al employmen ), g oss capi al o ma ion (GCF) and in la ion, Finally, giand s ands
o coun y-speci ic ixed e ec s and ime- ixed e ec s espec i ely, while he ei, depic s he e o e m.
Ou well-being index inco po a es age dependency, access o wa e , access o sani a ion, and li e
expec ancy, he ins i u ional quali y is measu ed by ou indica o s which a e go e nmen e ec i eness,
con ol o co up ion, poli ical s abili y and ule o law, en i onmen (CO
2
emissions) and economic
g ow h (GDP). No ewo hy, he concep o welI-being is e y comp ehensi e and hus measu ed by se -
e al indica o s. Howe e , i is impossible o inco po a e all well-being a iables in o a single eg ession
model. Fu he mo e, mos o he well-being indica o s a e highly co ela ed (Haile & Ni~
no-Za az
ua,
2018). Consequen ly, we employ he p incipal componen analysis (PCA) app oach o combine he
selec ed well-being a iables in o a single a iable. This p ocess allows he eplacemen o huge num-
be s o highly co ela ed well-being indica o s wi h small numbe s o unco ela ed indica o s. Th ough
he consolida ion o se e al a iables in o a single indica o , PCA eplica es he o iginal da ase .
The age dependency a io is a c ucial ac o in assessing well-being and economic g ow h. As he age
dependency a io ises, sa ings and in es men s decline, which in u n lowe s economic g ow h and li -
ing s anda ds. Con e sely, lowe dependency a ios p omo e economic pe o mance by imp o ing o e -
all sa ings and in es men (Oli e , 2015). O e all, he popula ion’s s uc u e a ec s economic g ow h
and well-being, making he age dependency a io an impo an indica o o agg ega e well-being.
Ha ing access o imp o ed wa e and sani a ion acili ies is essen ial o human su i al. Quali y wa e
and sani a ion se ices ha a e managed sa ely s imula e people’s hygiene and heal h ou comes, which
imp o es hei o e all well-being (A mah e al., 2018; Pullan e al., 2014). Con e sely, ain ed wa e and
inadequa e sani a ion acili ies exace ba e illnesses like chole a, hepa i is, dia hoea, yphoid, and
dysen e y, impai ing heal h and well-being. Ano he a iable included in he o ma ion o he well-being
index is he li e expec ancy me ic.
Acco dingly, highe li e expec ancy ypically signi ies imp o ed heal h and an adequa e s anda d o
li ing o indi iduals. Imp o ed li e expec ancy os e s human de elopmen , which is no mally used as
an indica o o well-being (Haile & Ni~
no-Za az
ua, 2018). On he o he hand, ins i u ional quali y is a
signi ican de e minan o bo h economic de elopmen and agg ega e wel a e. Sound ins i u ions os e
sus ainable g ow h by educing cos s associa ed wi h p oduc ion, ansac ions and manu ac u ing
(No h, 1990). Ins i u ional quali y d i es he go e nmen o pe o m i s unc ions e ec i ely and
e icien ly (Le & Kim, 2021; Sabi e al., 2019). The e o e, in he compu a ion o he well-being indica o ,
we include he ollowing a iables o accoun o ins i u ional quali y: poli ical s abili y, ule o law,
go e nmen e ec i eness, and con ol o co up ion.
The de imen al impac s o clima e change ha ha e pe sis ed o e he pas ew decades ha e
spu ed con e sa ions abou p ac ical s a egies o educing g eenhouse gas emissions. The cons an
inc ease in g eenhouse gas emissions has igge ed se e e wea he phenomena like loods, d ough s,
ele a ed empe a u es, and he de e io a ion o ecosys ems. Consequen ly, g eenhouse gas emissions
a e ha m ul o human well-being and he en i onmen (Om i, 2013). A p e ious s udy by Majeed and
Oz u k (2020) ound ha highe emissions o ca bon dioxide (CO2) lead o lowe li e expec ancy and
highe in an mo ali y a es. A e conside ing he signi ican in luence g eenhouse gas emissions ha e
on heal h ou comes, we choose o inco po a e his pollu an a iable in o ou well-being index. 0
Finally, we inco po a e eal GDP as a p oxy o economic g ow h, in o ou well-being index. Economic
g ow h is essen ial o people’s well-being since i cons i u es a subs an ial po ion o objec i e well-
being (Jones & Klenow, 2016). O e all, e e y a iable ha wen in o c ea ing ou well-being indica o is
essen ial o human de elopmen , and ou s udy is an icipa ed o make a signi ican con ibu ion o he
scan li e a u e on well-being. Disagg ega ed social spending will be based on h ee componen s social
COGENT ECONOMICS & FINANCE 5
p o ec ion, heal h and educa ion. Consequen ly, he wo k o Haile and Ni~
no-Za az
ua (2018), Lus ig
(2018), and Khan and Basha (2015) guided he selec ion o hese a iables.
The con ol a iables well-being model will include employmen , in es men and in la ion. The g ow h
o employmen s imula es economic pe o mance and he s anda d o li ing (A kinson, 2015). Employed
indi iduals can enhance hei quali y o li e wi hou ans e ing he inancial bu den o he go e nmen
(De , 2018). On he o he hand, in la ion is he mos impo an mac oeconomic a iable, and e en li le
changes in his indica o could nega i ely impac people’s quali y o li e. Gi en ha ising p ices imply
declining consume pu chasing powe , high in la ion is gene ally linked o poo well-being (Yolanda,
2017). Finally, in es men is undamen al o sus ainable g ow h because i simul aneously inc eases
agg ega e supply and demand and has posi i e ex e nali ies on well-being (Mankiw, 2010). Consequen ly,
he s udy employs g oss capi al o ma ion (GCF) as a p oxy o domes ic in es men .
3.2. P incipal componen analysis amewo k
To analyse he in luence o go e nmen social spending on agg ega e wel a e, we cons uc a well-being
index using he p incipal componen analysis (PCA). The p incipal componen s analysis is gene ally po -
ayed as a mul i a ia e app oach ha is esponsible o educing se e al a iables in o smalle o hog-
onal p incipal componen s, h ough linea combina ions o hose a iables (Kulo
glu & Ece i , 2017; Sabi
e al., 2019). Each new p incipal componen inco po a es as much in o ma ion as possible ha is no
accoun ed o by p e ious componen s. The e o e, he ini ial componen is esponsible o he highes
possible a ia ion in he o iginal a iables. A c i ical ea u e o he s uc u e is ha he ini ial and second
componen s a e unco ela ed. Fu he mo e, he hi d componen cap u es maximum in o ma ion which
is no p esen ed in he i s and second componen s. The P a iables o he model depic he s uc u e
in e dependence and a e also con e ed in o new a iables inco po a ing p ope ies o linea , o hog-
onal and unco ela ed (Dal on-G eyling & T egenna, 2014).
3.3. Econome ic s a egy
T adi ionally a panel es ima ion p ocess uses uni oo es s o e alua e he s a iona i y p ope ies o he
da ase o de e mine he sui able es ima ion s a egy. Howe e , Ki amu a and Phillips (1997), Sa pong
and Nke iah-Amponsah (2022) and Oka o e al. (2015) s a ed ha a non-s a iona y se ies can gene a e
obus and eliable ou comes unde he condi ions ha he sample size is sho , and he numbe o en i-
ies (N) exceeds he ime pe iod (T). The se ial co ela ion issue is mi iga ed when hese p e equisi es a e
me . Fu he mo e, he e is a possibili y ha ou wel a e empi ical analysis may be exposed o he endo-
genei y, meaning ha social spending a iables a e no exogenously de e mined. Acco dingly, go e n-
men spending on social sec o s (educa ion, heal h and social p o ec ion) and well-being could be
de e mined by he same unobse ed ac o s. Also, well-being may in luence social spending (a phenom-
enon e e ed o as e e sed causali y. No ably, i he endogenei y p oblem is no accoun ed o in
he eg ession, hen he gene a ed slope o coe icien s may be biased. Thus, o add ess he issue o
endogenei y we employ he Gene alised Me hod o Momen s (GMM) es ima o .
3.4. Gene alised Me hod o Momen s (GMM)
The Gene alised Me hod o Momen s (GMM) amewo k was ounded by A ellano and Bond (1991). The
co e p ope ies o his dynamic es ima o a e o con ol o unobse ed coun y he e ogenei y, endoge-
nei y issues, measu emen e o s and omi ed a iable bias p oblems. GMM gene a es obus esul s
when dealing wi h small sample sizes and mo e c oss-sec ional obse a ion. Fu he mo e, a GMM is con-
side ed o be supe io o an ins umen a iable (IV) since, in he p esence o he e oskedas ici y, a GMM
es ima o is mo e e icien han an IV es ima o (Haile & Ni~
no-Za az
ua, 2018), whe eas, in he absence o
he e oscedas ici y, he GMM es ima o is no wo se asymp o ical han he IV es ima o . The o iginal GMM
es ima o is e e ed o as di e ence GMM and is exp essed as ollows:
6 R. T. GUMEDE ET AL.
Wi −Wi −1¼a−1
ðÞ
Wi þb0Xi þliþei, (2)
F om equa ion 2, he le -hand side measu es he g ow h a e o well-being a ime (i), While Wi is
he well-being index, iindexes indi idual coun y and ime pe iod (yea ), he Xi s ands o a ec o o
explana o y a iables, while he unobse ed coun y-speci ic e ec is deno ed by li, las eis and o dis-
u bance e m. Rew i ing equa ion (2), ansla e o:
Wi ¼aWi −1þb0Xi þliþei, (3)
To elimina e coun y-speci ic e ec s, we ake he i s di e ences o equa ion 3:
Wi −Wi −1¼aWi −1−Wi −2
ðÞ
þb0Xi −Xi −1
ðÞþ
ei −ei −1(4)
The GMM panel es ima o uses he ollowing momen condi ions:
EW
i −sei −ei −1
ðÞ
¼0 o s 2; ¼3, …,T
EX
i −sei −ei −1
ðÞ
¼0 o s 2; ¼3, …,T
The di e ence GMM es ima o u ilises he ini ial alues o explana o y a iables and he lagged o
dependen a iables as ins umen s. To gene a e obus and eliable coe icien s unde he i s di e -
ence speci ica ion he hypo heses o weak exogenous a iables and he absence o second se ial co el-
a ion in dis u bance e ms mus hold. Howe e , like o he econome ic modelling app oaches he i s
di e ence GMM es ima o has some limi a ions. Fi s ly, when he eg esso s a e pe sis en o e ime,
hei lagged le els become poo ins umen s o he a iables in he di e en speci ica ions. Secondly,
he issue o weak ins umen s also p e ails when he sample size is sho (A ellano & Bo e , 1995;
Blundell & Bond, 1998; Kuma , 2013). Blundell and Bond (1998) in oduced he ex ension o di e en
GMM which is e e ed o as he sys em GMM es ima o . This new es ima ion app oach cons uc s he
sys em GMM using wo equa ions. The o iginal equa ion ( i s di e ence equa ion wi h le els as ins u-
men s) and addi ional equa ion exp essed in le els wi h i s di e ences as ins umen s. The e o e, he
momen o condi ions o he added equa ion in le els is depic ed as ollows:
EW
i −s−Wi −s−1
ðÞ
li−ei,
ðÞ
¼0 o s ¼1
EX
i −s−Xi −s−1
ðÞ
li−ei,
ðÞ
¼0 o s ¼1
Blundell and Bond (1998) concluded h ough he Mon e Ca lo simula ions ha he ex ended GMM
model is compa a i ely mo e e icien han he i s -di e ence GMM model. The e o e, we employ he
sys em GMM as he baseline es ima o .
3.5. Robus ness es ing: Panel Co ec ed S anda d E o s (PCSE)
The sys em GMM es ima o add esses endogenei y issues. Howe e , he p oblem o con empo aneous
co ela ion, which a ises when he idiosync a ic dis u bance ac o s a e connec ed ac oss coun ies, is
igno ed by he sys em GMM. As a esul o ade links, he e is a s ong likelihood ha c oss-sec ional
dependency may a ise among he obse ed na ions. The e o e, o conduc ou obus ness assessmen
we employ he Panel Co ec ed S anda d E o (PCSE) es ima o pionee ed by Beck and Ka z (1995). This
sophis ica ed echnique accoun s o c oss-sec ional dependence, he e oscedas ici y, and au oco ela ion.
The PCSE es ima o yields obus es ima es when he numbe o c oss-sec ions (N) is g ea e han he
ime dimension (T). Gi en ha he c oss-sec ional uni s (54 coun ies) exceed he ime dimension (2002–
2019), he PCSE model is he e o e app op ia e o ou si ua ion (Bailey & Ka z, 2011).
4. Resul s and discussion
This sec ion p o ides an empi ical analysis o he nexus be ween go e nmen social spending and agg e-
ga e well-being in uppe middle-income and high-income economies. I is c ucial o asce ain whe he
he e a e collinea i y p oblems among he explana o y a iables in each model be o e p esen ing ou
es ima ion esul s. The esul s o he pai wise co ela ion ma ix es a e shown in Table 1. Conce ns o
pe ec collinea i y be ween he explana o y a iables a e diminished in ou si ua ion because co ela ion
COGENT ECONOMICS & FINANCE 7
should p ima ily ocus on he heal h sec o . The p oposed implemen a ion should occu wi hou aban-
doning he o he edis ibu i e p og ams.
6.2. Limi a ion and u u e esea ch
Du ing he cons uc ion o ou wel a e index, we concen a ed p ima ily on objec i e well-being ac o s,
while o e looking subjec i e well-being. Fu u e s udies should use mixed me hods since he quali a i e
side o his app oach will allow esea che s o cap u e he subjec i e aspec s o well-being which ela e
o human psychology. The e o e acqui ing subjec i e well-being da a h ough in e iews, ques ionnai es
and su eys. On he o he hand, he quan i a i e side will ocus on objec i e well-being. The e will be
signi ican con ibu ions o he ield o well-being esul ing om he applica ion o his me hodology.
No e
1. A dynamic model is p e e ed o e a s a ic model o cap u e ine ia e ec s and he pe sis en na u e o wel a e
imp o emen s.
Acknowledgemen s
We a e g a e ul o P o esso I. Kasee am om he Uni e si y o Zululand, Depa men o Economics o knowledge
sha ing and sugges ions du ing he ini ial phases o ou s udy.
Au ho s con ibu ions
Concep ualiza ion, R.T.G; B.T.M; and L.G; Me hodology, R.T.G.; B.T.M; So wa e, R.T.G.; B.T.M; Fo mal analysis, R.T.G.;
Resou ces, R.T.G.; Da a cu a ion, R.T.G.; W i ing—o iginal d a , R.T.G.; Supe ision, L.G. and B.T.M. All au ho s ha e
ead and ag eed o he published e sion o he manusc ip .
Disclosu e s a emen
No po en ial con lic o in e es was epo ed by he au ho (s).
Funding
This p ojec was sponso ed by he Na ional Resea ch Founda ion bu sa y scheme, unique G an No: 118433.
Abou he au ho s
Ru h Thandazile Gumede is a doc o al s uden (PhD) a he Uni e si y o Zululand, Depa men o Economics in
Sou h A ica. He esea ch in e es s include Well-being, Social policy, Poli ical Economy and de elopmen economics.
Lo aine G eyling is he Dean o he Facul y o Comme ce, Adminis a ion, and Law, and p o esso o Economics a
he Uni e si y o Zululand in Sou h A ica, She holds a doc o a e in Economics. He esea ch in e es s a e
Mac oeconomics, De elopmen Policy Issues, Econome ics, Economic His o y and Quan i a i e Analysis. She is he
chai o he Ins i u ional Fo um and is a membe o he Council o he Uni e si y o Zululand.
B ian Ta onga Mazo odze holds a doc o a e in Economics and lec u es unde g adua e cou ses in S a is ics and
Econome ics a Sol Plaa je Uni e si y Sou h A ica. His a ea o specialisa ion includes T ade, De elopmen and
Indus ial economics.
ORCID
B ian T. Mazo odze h p://o cid.o g/0000-0002-7799-4627
Da a a ailabili y s a emen
The s udy’s da ase is a ailable upon eques om he co esponding au ho , R.T. Gumede.
14 R. T. GUMEDE ET AL.
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Appendix
Table A1. Selec ed coun ies.
Uppe middle-incomes coun ies High-income coun ies
1. Albania 1. Aus alia 20. Japan
2. A gen ina 2. Aus ia 21. La ia
3. B azil 3. Belgium 22. Li huania
4. Bulga ia 4. Canada 23. Luxembou g
5. China 5. Chile 24. Mal a
6. Colombia 6. C oa ia 25. Ne he lands
7. Cos a Rica 7. Cyp us 26. New Zealand
8. Dominican Republic 8. Czech Republic 27. No way
9. Jamaica 9. Denma k 28. Poland
10. Mexico 10. Es onia 29. Po ugal
11. Panama 11. Finland 30. Singapo e
12. Pa aguay 12. F ance 31. Slo ak Republic
13. Pe u 13. Ge many 32. Slo enia
14. Romania 14. G eece 33. Spain
15. Russian Fede a ion 15. Hunga y 34. Sweden
16. Sou h A ica 16. Iceland 35. Swi ze land
17. I eland 36. Uni ed Kingdom
18. Is ael 37. Uni ed S a es
19. I aly 38. U uguay
Sou ce: Wo ld Bank.
COGENT ECONOMICS & FINANCE 17
Table A2. Da a desc ip ion and sou ces.
Va iables Desc ip ion Sou ce
GDP In his case, GDP deno es g oss domes ic p oduc
(calcula ed a cons an 2010 p ices). GDP is
calcula ed by inco po a ing he alue o he inal
p oduc s and se ices p oduced in a speci ic coun y
o e ime.
WDI
Educa ion expendi u e Gene al go e nmen spending on educa ion is
exp essed as a pe cen age o GDP, annually.
IMF-GFS SOXC
Heal h expendi u e Gene al go e nmen spending on heal h is exp essed as
a pe cen age o GDP.
IMF-GFS SOCX
Social p o ec ion spending Gene al go e nmen spending on social p o ec ion is
exp essed as a pe cen age o GDP, annually.
IMF_GFS SOXC
Age dependency Re lec s he a io o dependen s be ween 15 and
64 yea s old o indi iduals o he wo king age
popula ion (15-64 yea s old).
WDI
CO2 emission P esen ing ca bon dioxide emissions (kg pe 2017 ppp
$ o GDP) gene a ed om ossil uel combus ion and
cemen p oduc ion.
WDI
Employmen Employmen in se ices (% o o al employmen ). This
sec o comp ises se e al indus ies such as eal
es a e, inance, insu ance, wholesale and e ail ade,
es au an s, lodging, and ho els; in addi ion o
anspo a ion, s o age, and communica ions.
WDI
G oss capi al o ma ion G oss capi al o ma ion (%GDP) ep esen s he ixed
asse s o he economy.
WDI
In la ion An economy’s o e all inc ease in he cos o goods and
se ices is known as in la ion. Using he consume
p ice index (annual %) we measu e in la ion.
WDI
Con ol o co up ion This indica o po ays he pe cep ions o how public
powe is being exploi ed o p i a e gain, cap u ing
bo h small-scale and massi e co up ion.
WGI
Go e nmen e ec i eness Assesses he public’s pe cep ion o he go e nmen ’s
commi men s o deli e ing public se ices, i s
quali y, and i s independence om poli ical
p essu es.
WGI
Rule o law Po ays he us and compliance o people wi h he
ule o law, pa icula ly conce ning con ac
en o cemen , p ope y igh s, cou en o cemen ,
along c ime and iolence isks.
WGI
Poli ical s abili y This indica o cap u es people’s iews o he po en ial
o poli ical ins abili y.
WGI
Li e expec ancy Li e expec ancy, a bi h (yea s) Depic s li e expec ancy
o in an a bi h assuming ha mo ali y a e
eco ded a bi h emains cons an .
WDI
Basic d inking wa e Access o imp o ed d inking wa e (% o he
popula ion).
WDI
Sani a ion Access o sa e y managed sani a ion se ices (%
popula ion)
WDI
18 R. T. GUMEDE ET AL.
