Economic science/ 16.Macroeconomics

Kapelyuk S.D., senior lecturer

Siberian University of Consumer Cooperatives, Russia

The main principles of the new human development index

 

In 2010, the United Nations Development Programme presented the new methodology of the most popular social indicator – the human development index (HDI). This change was generally caused by the critique of the old methodology. However, the new methodology immediately generated the new wave of the critique. For example, Martin Ravallion, the Director of the World Bank's Development Research Group, argued that the new functional form of the HDI is inappropriate because it caused the “troubling trade-offs” between longevity and income [5]. His article promoted a long discussion in the literature [4; 6]. In our opinion, the determination of the principles of the new HDI would be a significant contribution to this discussion.

The human development index is a summary measure of three indicators: longevity, educational attainment and income. The index was created by Pakistani economist Mahbub ul Haq. Until 2010 the index for country k was calculated by the arithmetic mean:

,                                                            (1)

where Jõ1 is longevity index, Jõ2 is education index, Jõ3 is income index, õi is the indicator for index i [1, p. 269].

Life expectancy of birth (õ1) was the indicator of longevity, the combination of adult literacy rate and gross primary, secondary and tertiary enrollment ratio (õ2) formed the indicator of education, GDP per capita in the purchasing power parity dollars (õ3) was the indicator of income. An individual index (Jõ1 , Jõ2, Jõ3) for country k was calculated according to the formula:

,                                                 (2)

where max õi  is fixed maximum value of indicator i, min õi  is fixed minimum value of indicator i.

Computing the income index (Jõ3) had differences:

.                           (3)

Logarithmic functional form makes the composite index less sensitive to extremely high values of income. In accordance with the main principles of human development achieving a respectable level of well-being does not require high income. Increasing of income is more important for medium and low human development countries.

The 2010 Report presented four significant changes in constructing the HDI [2, pp. 263–264]. First, the index for country k is calculated now by the geometric mean:

                             (4)

The geometric mean makes the index more sensitive to outlying values of the indicators.

Second, the maximum values (max õi ) are not fixed but defined as the actual observed maximum values of the indicators.

Third, gross national income (GNI) per capita is used for constructing the income index in place of GDP per capita.

Fourth, education index (Jõ2) is based on new indicators: mean years of schooling and expected years of schooling. This subindex for country k is calculated now according to the formula:

,                                  (5)

where y is mean years of schooling index, z is expected years of schooling index.

We marked out the principles of the new methodology by examination of substantiation of the 2010 HDI by Krugman et al [3]. They are the following:

1.     Reflecting opportunity freedoms. The opportunity freedom means the opportunity to achieve the things that we have reason to value [7]. Another kind of freedom, process freedom, is beyond the new human development index.

2.     Diminishing returns from all of the components of the human development index. It is achieved by the nonlinear functional form of the HDI. Transition from arithmetic mean to geometric mean also eliminated the perfect substitutability of the HDI components.

3.     Neglect of inequality. Inequality is measured by other indices: the Inequality-Adjusted HDI, the Gender Inequality Index, and the Multidimensional Poverty Index.

These principles have important implications for the broader domain of the human development theory.

References:

1.                 Human Development Report 2000. – New York: United Nations Development Programme, 2000 [Electronic resource]. – Access mode: http://hdr.undp.org/en/media/HDR_2000_EN.pdf

2.                 Human Development Report 2010. – New York: United Nations Development Programme, 2010 [Electronic resource]. – Access mode: http://hdr.undp.org/en/media/HDR_2010_EN_Complete.pdf

3.                 Klugman J., Rodriguez F., Choi H. The HDI 2010: new controversies, old critiques // Journal of Economic Inequality. – 2011. – ¹ 9. – Pp. 241–288.

4.                 Klugman J., Rodriguez F., Choi H. Response to Martin Ravallion // Journal of Economic Inequality. – 2011. – ¹ 9. – Pp. 497–499.

5.                 Ravallion M. Troubling tradeoffs in the Human Development Index // Journal of Development Economics. – 2012. – In press.

6.                 Ravallion M. The human development index: a response to Klugman, Rodriguez and Choi // Journal of Economic Inequality. – 2011. – ¹ 9. – Pp. 475–478.

7.                 Sen A. Rationality and freedom. – Harvard University Press. – 2004. – P. 506.