The Human Development Index vs. Income Per Capita

February 27, 2013

The HDI is a more accurate measure of human well-being than either the income per capita approach or Amartya Sen’s capability approach.
The concern with finding better ways of measuring human well-being has been a growing focus of economics in recent years. Its importance is underscored by the vigorous debate over the degree of progress (or lack thereof) that has accompanied the accelerated globalization of the last 30 years. The answer depends in large part on which measures one feels are most accurate. Often the reason for choosing measures depends on the ideology of the researcher.
“Human well-being” is an ambiguous concept with varying definitions. While recognizing that my definition foreshadows the direction of this paper, I will use the definition found in the 1990 UNDP report (Klugman, F. and Choi, H.: 3) that states human well-being is concerned with human capabilities and freedom of choice in one’s life. Choices may be many, but three which are arguably universal are the freedom to live a long and healthy life, freedom to learn, and freedom to have a decent standard of living.
I argue that the Human Development Index (“HDI”) is indeed a more accurate measure of human well-being than either income per capita or Sen’s capability approach, but there is, as yet, no ideal measure which is universally applicable­.. Furthermore, I argue that it is unlikely that a universally applicable and acceptable measure can be found.  However, the search for one has succeeded in leading to a deeper analysis of the objectives of the comparisons being made, consideration of the relevant models, and determining the relative weighting of variables which differentiate populations being compared. I will also suggest that the roots of the debate lie in differences in economic ideology.
I will describe the background leading to the creation of the human development index, followied by the developmental work around the capability theory. Major arguments in support of this new index will be reviewed and analyzed. Following that, each of the four areas of common criticism will be addressed and the weaknesses of the criticisms will be shown.  Last, I will summarize by adding that the over-arching value of the index has been to point the way to a highly differentiated future of comparisons chosen around the particular objectives of policy makers.
Supporters of HDI (beyond the team of creators) include the United Nations (UNDP), Nobel Prize winner Joseph Stiglitz (Goodman, P.: 2009) and Dani Rodrik (Rodrik, D. : 2011) of Harvard amongst others. Their central argument is that there is a great deal more to human well-being than improvements in income. Criticisms mainly fall into four categories: How to define human well-being, composition of the index, usefulness, and measurement. Among the critics are Mark McGillivray of the World Institute for Development Economics Research and Martin Ravallion of the World Bank.
 GDP or GNP per capita had previously been the predominant measure of growth, with the presumption that economic growth and well-being were synonymous until the 1970’s, when the income measure came into question. Nordhaus and Tobin challenged the reliance on this single variable in 1972, and later others joined the search. Ultimately, the HDI emerged as the most widely used index, when considering human well-being. (Simon 2006: 261)
The capability approach was the foundation for the work leading to the development of the HDI. It is not an index in itself, but a theory. As such, we could rule it out as not addressing the essay question, because it does not measure.  However, it is a powerful and influential theory addressing the question of how best to understand human well-being, and it has stimulated the creation of valued indices including the HDI, so we shall consider it.
Professor Amartya Sen (2001:1), 1998 Nobel Prize Winner who was the leading force, along with Nussbaum, Anand, Foster and others to create the theory, describes his capability approach in this way:
Development can scarcely be seen merely in terms of enhancement of inert objectives of convenience, such as a rise in the GNP (or in personal incomes), or industrialization, or technological advance, or social modernization. These are, of course, valuable — often crucially important — accomplishments, but their value must depend on what they do to the lives and freedoms of the people involved
The capability approach does not directly challenge the value of income.  It argues that there are additional values which are important, and for many people, some of those are more important than income. Here are some of the benefits scholars attribute to the capability theory: (1) Sen’s view that a person’s well-being is determined by capability within his own situation is an advancement over the idea that standard of living can be equated with real income; (2) since indices are about seeking equality and equity, the capability approach raises a valuable question of just what it is that we are seeking to equate; (3) capability fills a space between two things which have been the prior focus–goods and utility—that being functionings and capabilities; and (4) it draws attention to the valuable consideration of varying interpretations of development. (Gaspar 1997) There is little literature to be found which in any way denies the value of these considerations in human life.
The capability theory work evolved to the creation of the HDI which was first released in 1990. The creators of the HDI were, most notably, Amartya Sen, collaborating with Mahbub ul Haq, Martha Nussbaum amongst others. They pointed out that there are many among the bottom half of world income who feel they have human well-being, and there are many in the upper half who do not feel they have satisfactory human well-being. Consider a young woman of great potential and ambition who lives in the tribal regions of Afghanistan and feels the education denied her is far more important than her family income. We can trace the realization regarding the exaggerated value of wealth all the way back to Aristotle (Aristotle: 384-222) who told his world that “…wealth is evidently not the good we are seeking, for it is merely useful and for the sake of something else.” Sen and colleagues were attempting to point toward that “something else.”
The United Nations Development Programme (“UNDP”) Human Development Report for 2006 (2006:  263) describes the structure and intent of the index:
Each year since 1990 this report has published a human development index (HDI) that looks beyond GDP to a broader definition of wellbeing. The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrolment at the primary, secondary and tertiary level) and having a decent standard of living (measured by purchasing power parity, PPP, income).
UNDP adds that they do not defend the index as comprehensive in measuring all of human development. They do not argue for HDI as a replacement for GDP, and they do not argue that the particular indicators of the HDI are the only relevant measures. They argue that it adds (“looks beyond”), and in that respect it may be seen as “better.” The formula has grown in popularity and is now widely used and studied. (Ashok, V. 2010)
However, some critics claim there are flaws and/or limitations to the HDI.  Martin Ravallion of the World Bank is one economist who takes issue with the HDI as an effective index. Ravallion (2010:  9) describes indicators of the nature of the HDI as “mashup indices,” and he has serious problems with such indicators:
Some mashup indices have alluded to theoretical roots, to help give credibility. However, there is a large gap between the theoretical ideal and what is implemented. For example, the HDI claims support from Sen’s writings arguing that human capabilities are the relevant concept for defining welfare or well-being…Yet it is quite unclear how one goes from Sen’s relatively abstract formulations in terms of functionings and capabilities to the specific mashup index that is the HDI. Why, for example, does the HDI include GDP, which Sen explicitly questions as a relevant space for measuring welfare?
It is appropriate to correct a possible misinterpretation here. It is true that Sen questions the use of GDP, but only as being the only measure, or the best measure. He does not argue against it being use as “a” measure, evidence by his including it as one of the three elements of the HDI.
Ravallion (1997: 637), acknowledges the value of other indices, but also defends income. He says there can certainly be “low quality growth,” but the bigger issue is that there is just not enough growth “of even quite normal quality.” Ravallion’s comments do not directly challenge the concept (definition) that human capabilities and freedoms are a relevant concept, but he does challenge the composition of the HDI. One could certainly identify dozens of indicators, each with an arguable bearing on well-being, such as freedom from oppression, sacrosanct property rights, gender equality, and many others. Some might be easily measurable, and others only with great difficulty. The end result of too many indicators was perhaps seen by Sen and colleagues as only adding to the unwieldiness and difficulties of comparison.  Also, there is reasonable data available for life expectancy and education. Many other indicators have less reliable data available.
UNDP (UNDP 2011) provides the best answer to the question of why not other indicators, or more indicators. Their statement is that they support complementary indices to cover the “missing dimensions” in the HDI. It should be self-evident to all that HDI is not, and was never promised to be, a universal measure of all aspects of human well-being.
It is important to note that Sen does not speak of specific indices as determinative, even in 2001, subsequent to his launching of the HDI. He speaks of “a deeper basis of evaluation,” of “focusing on interconnections,” and of “seeing how” we can strengthen our understanding of human well-being. Sen has sometimes been misinterpreted as suggesting that a single index (HDI) will simplistically address the heterogeneity of different nations and cultures and magically make them entirely comparable. Rather, he clearly recognizes the different values placed on different freedoms under different circumstances. Sen  said clearly (above) that he was only trying to stimulate valuable examination with the capability theory and the HDI. He did not argue that the HDI was “perfect” as an index.
Mark McGillivray (1991:  1497), Australian economist, challenges both composition and usefulness of the HDI. Labeling the HDI as “yet another redundant composite intercountry development indicator,” he finds the strong correlation of life expectancy and education indicators with GDP as suggesting the HDI adds nothing to GDP.
One might well ask the  question—if GDP is as powerful as both Ravallion and McGillivray imply, then what is the disadvantage of including it?  A three part blended index with GDP included adds something to health and education taken alone, and the addition of health and education add something to GDP taken alone.
As to whether there is so much correlation to make the HDI essentially redundant to GDP per capita, one must only take a look at the 2011 UNDP Report, especially the column showing GNI per capita rank minus HDI rank (UNDP 2011: 127) for an easy answer. If it made no difference, there would be little variance shown, but what about Qatar at -36, Georgia at +36, and Equatorial Guinea at -91, to name only a few? There are many significant differences. There is clearly more than enough lack of correlation between GNI and HDI to potentially lead to discovery of valuable future policy options for particular countries. This also counters the usefulness charge from McGillivray—the HDI is useful if it leads to insights not revealed by income per capital alone.
What can we say concerning the adequacy of income per capital taken alone? The argument is that income per capita seems a necessary condition for poverty reduction and enhanced human capability. Critics of the HDI further argue that while economic growth is not the same as economic development, economic growth is closely associated with such positive factors as employment creation, productivity improvements, diversification of production, increased fiscal revenues (which enable social spending on health and education), and development of groups such as labor unions and political parties (which are among the “choices” which Sen and Nussbaum value in their research of human well-being). This is true, but it doesn’t really address the previous point that HDI does indeed reveal opportunities that income does not.
Pritchett and Summers (1996: 38), see value in both approaches. They admit income per capital explains less about mortality than would be desired, but argue only that there is some correlation. Such scholars have not really denied the value of the HDI. They only argue that income measurement is valuable and gets close in many cases. They even acknowledge that the HDI’s “other variables” may be important.
Similarly, even McGillivray (1991:  1467) makes a concession, acknowledging that the search for better indicators, motivated by the HDI,  may lead to the advancement of the understanding of development. This appears to be the central motivation of Sen and the UNDP in supporting the HDI as better than income per capita.  Subsequently, McGillivray calls for more research to obtain data on indicators other than GNP or HDI. McGillivray points to our conclusion—that the search for better indicators is the path to progress.
Returning to my definition, perhaps the answer to the question of which most accurately measures human well-bring is best understood in reviewing underlying ideology. While the dominant theory of the last 30 years has been neoclassical (Stein 2006: 596), economists are far from agreed with the neoclassical view that GDP is the key measure of growth, much less well being. The major point of disagreement centers around the fundamental neoclassical belief that inequality is important as an incentive to getting one’s needs met (Hunt 1989: 326). Clearly, Sen does not put the highest priority on this aspect of human behavior. He is joined by many scholars, as argued above.
Dedication to GDP growth alone and the associated neoclassical view that exchanging goods is the full definition of human happiness even came to be questioned by none other than the World Bank (World Bank 2005: xiii) in its 2005 Report “Learning from a Decade of Reform.” Noting that across the 90’s and early 2000’s, there were great successes to neoclassical “Washington Consensus” prescriptions to developing countries, there were also great failures, they admitted:
The central message of this volume is then that there is no unique universal set of rules. Sustained growth depends on key functions that need to be fulfilled over time: accumulation of physical and human capital, efficiency in the allocation of resources, adoption of technology, and the sharing of the benefits of growth
The report goes on to highlight the need for a better understanding of noneconomic factors—history, culture, and politics—in economic growth processes. While the World Bank may not be a leader in challenging neoliberal theory in its policies and practices, it is noteworthy that this powerful organization was forced to acknowledge as early as 2005, that there are other factors to be considered in the reals of history, culture, and politics.
I should add that there is much opportunity for advancement in this realm of research. There is a need to understand the data: Do countries with poor birth and death registrations have accurate life expectancy measures? If life expectancy in one culture as valuable as education?  Does enrollment mean education? There are many challenges to “getting it right.”
While it appears likely that the income per capita approach will not to be (and should not be) abandoned  by reason of the arrival of the HDI or other such indicators designed to measure human well-being, the capability approach and the index borne of that work, the HDI (and other more recently developed indices), have advanced understanding of development economics by including valuable indicators. The HDI points the way to a deeper understanding of developmental differences and opportunities than is addressed by income per capita. In this regard, the HDI is better than income per capita as a measure of well-being. The above argument has shown that the HDI is very useful. It reveals important comparisons that are not provided by income alone. It includes income, recognized as also important. It is based on measurable data sources.

As to criticisms of definition and composition, it does not purport to be a universal solution to all valuable comparisons, although some have used it in this manner, thus perhaps generating some of the unjustified criticism.
The question of this essay asks about human well-being, not about growth or even “development.” If the HDI leads to relevant comparisons, and a study of differences leads even further to consideration of policy changes that may yield development advances, then HDI has played a very valuable role, a role that income alone cannot play.
The HDI and its underlying capability theory have clearly advanced  development economics beyond that which would have occurred if the science rested solely on income per capita. HDI is better than income alone. It is more “accurate,” in part because it is broader than income alone, in part because it includes other valuable meaures. The challenges serve not so much to disprove the value of the HDI as to confirm its underlying theory—that we need to look beyond income. One imagines Sen would enjoy hearing such challenges, as they lead mostly to greater study of well-being variables, which appears to have been his original intent with the capability theory. The continuing proliferation of other indices based on data increasingly available points to a better opportunity for research and policy adjustment in the future, while not promising a single universal solution.
Aristotle, Nichomachean Ethics..???
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