HDI characteristics and components

Measuring development

A country's development refers to the improvements made in terms of the wellbeing of its citizens. Wellbeing can be assessed by using a range of metrics, including growth in national income per head, life expectancy of the population, and educational experience. Economic development relies heavily on economic growth, and while it is necessary for development, economic growth in itself is not sufficient to improve welfare.

Given that development is multi-faceted, attempts to measure the level and rate of development rely on composite indices rather than individual measurement of a single dimension. The Human Development Index (HDI) was introduced in 1990 and quickly became the internationally accepted method of assessing economic development.

The HDI, which was developed by the United Nations Development Programme - UNDP, has three dimensions to its measurement, with each dimension having its own index. The three indices - the Life expectancy index, the Education index and the GNI (Gross National Income) index are equally weighted (at 33.3%) in the overall HDI.

HDI index showing dimensions

GNI per capital at Purchasing Power Parity (PPP) means that the raw data for GNI has been adjusted to take into account differences in purchasing power between different countries and currencies in terms of purchasing a common basket of goods. Hence, the adjusted GNI figures are more closely related to the real value of a country's income in terms of what goods and services it can purchase with that income.


Limitations of the HDI

Limitations

  1. Having one ‘average’ HDI measure for a single country fails to take into account the diversity of development within a country. For example, some regions could have much greater levels of development than others. This is especially true in developing economies, with urban dwellers experiencing a much higher level of development than those in rural areas, many of whom will be living a subsistence way of life.

  2. This can also be applied to the extent of inequality and poverty in a country. The HDI of a country could rise because of a relatively small section of the population doing very well, which pushes up GNI per head, but has little beneficial impact on others.

  3. The GNI index can be misleading because activities which add to GNI can reduce economic welfare, such as more use of vehicles which adds to GNI but creates negative externalities, or road building which adds to GDI but might also lead to negative externalities in the future.

  4. Changes in policy can take a long time to influence the HDI, which creates a disincentive for politicians to make changes. For example, improvements in healthcare and health spending may take decades to influence life expectancy.

  5. As many economists have argued, the HDI does not include some features of economic and social life that may add to development, such as the sustainability of using resources, and the subjective assessment of ‘happiness and wellbeing’.

  6. Data gathered from some less developed economies may be unreliable.

  7. Finally, the three components of GNI per capita, life expectancy and education are equally weighted in the index, which, it could be argued, is an arbitrary allocation of weights.

Map showing global development levels - based on the HDI

New indices

Since the introduction of the HDI attempts have been made to widen the notion of development by adding new metrics, developing new indices, and focusing on different dimensions. For example, the Human Poverty Index (HPI) was launched in 1997 to track levels of deprivation in the developed and developing world. The HPI-1 considers poverty in the developing world, whereas the HPI-2 considers poverty in the developed world.

The HPI was superseded by the Global Multidimensional Poverty Index (MPI) in 2010. This looks at both the incidence of deprivation and the 'intensity' of deprivation.

The Gender Inequality Index

Gender inequality is increasingly seen as an important constraint on economic development. The Gender Inequality Index (GII) was introduced in 1995 as recognition of the important role gender equality can play in promoting wellbeing.

There are three basic dimensions to the GII - health, empowerment, and labour market participation.

Gender inequality index - diagram showing dimensions of inequality

Map of countries by Gender Inequality Index (Based on 2019 data, published in 2020)

Gender Inequality Index 2019.svg

Source: Asus2004

License: Creative-commons


Unemployment

What causes unemployment?

Unemployment
Externalities

What activities create externalities?

Externalities
Supply-side policy

Can supply-side policy promote development?

Supply-side policy