Human Development Index Challanges and a way forward

Human Development Index: Challanges and a way forward Milorad Kovacevic Human Development Report Office, UNDP Workshop on Measuring Human Development, June 14, 2013 GIZ, Eschborn, Germany United Nations Development Programme Human Development Report Office 1

Human Development A standard definition of human development (1990 HDR): “[…] a process of enlarging people’s choices to lives they have reason to value… The most critical ones are to lead a long and healthy life, to be knowledgeable and to enjoy a decent standard of living. ” A broader definition (2010 HDR): “Human development is the expansion of people’s freedoms to live long, healthy and creative lives; to advance other goals they have reason to value; and to engage actively in shaping development equitably and sustainably on a shared planet” 2

• • • Measuring is as more relevant than ever Quantifying and describing our changing world Finding ways of improving people’s well-being: o • • • Informed policy making and advocacy Human development is an evolving idea As the world changes – analytical tools change But there is a persistent importance of the chain: Concepts Measurements Impacts 3

Human Development Index Emphasizes that outcomes for people and their capabilities should be the ultimate criteria for assessing the progress of a country, not economic growth alone. Accounts for average achievements in • life expectancy (proxy for leading a long and healthy life), • education (proxy for being knowledgeable) and • income per capita (proxy for command over resources to have a decent standard of living). 4

Human Development Index (Contd. ) A simple index (non-comprehensive) with the purpose of - initiating discussions - attracting attention to issues that prevent countries from performing at a higher level - international comparison and benchmarking - temporal comparison 5

General criteria for a good HDI (Foster, 2013) (I) Corresponds to strong policy and advocacy needs • Understandable and easy to describe - Understandable at a deeper level including goalposts and group-cutoffs Measuring absolute “size of HD” - independent from other countries • Conforms to a notion of what is being measured - Anchored in underlying variables Numbers mean something (II) Concerns the intended purpose of the index • It must fit the purpose for which it is being developed - - Complements GDP or/and GNI Compares HD achievements across countries Monitors progress across time for a given country Analytical utility (subgroups or dimensions) 6

General criteria for a good HDI (contd. ) (III) Theoretically justified • Technically solid - Axioms to make sure that index’s properties conforms to purpose Theoretical framework (within human capabilities approach and/or welfare economics) (IV) Practicality • Operationally viable and easily replicable - Works with existing data for all the countries and all the years - It can be updated in time 7

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How to decide about demarcation cut-offs for categorizing countries into different levels of HD? • Fix absolute demarcation cut-offs for categorizing countries - Choose relatively, then fix absolutely, or - Look within variables for natural cut-offs • Cut-offs are always arbitrary - Like poverty lines, like middle class ranges • But if fixed over time, countries can progress - Consistent cut-offs can be maintained over time 10

Changes in the HDI introduced in 2010 Goal posts Minima: Fixed at “natural zeros” Maxima: Observed maxima since 1980 Comments: • A possible change of maxima every year; • HDI level of Congo depends on LE of Japan, education in USA and GNI of Qatar (!? ) Group cut-offs (relative) Cut-offs: Quartiles of HDI distribution Groups: Quartile groups of equal size Comments: • Little movement mostly within the group • To move to the higher quartile, another country has to move to the lower • Progress against other countries, rather than against arbitrary numerical cut-offs • Fuzzy incentives, less practical value for the country HDI value and rank: change between two years Due to: • Real change in performance • Data revision • Change in goalposts (maxima) 11

Logarithmic transformation of income • Diminishing marginal utility of income 12

Logarithmic transformation in other dimensions • There arguments for and against transforming the health and education variables to account for diminishing returns. • Health and education are not only of intrinsic value; they, like income, are instrumental to other dimensions of human development not included in the HDI. • Their ability to be converted into other ends may likewise incur diminishing returns. HDRO 13

Alternative transformations for variables? • Simplicity is always better • By transforming variables it is harder to interpret change on the ground with change in the index – it is a function of the normalized transformed variables! • No possibility for subgroup decomposition • Chakravarty (2003) with all variables transformed by a common concave function 14

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Aggregation: Geometric mean Critiques: • A well rounded performance across dimensions is not a requirement within the human development approach • Development/government policies should not be focused on maximizing the HDI • Changing of aspiration levels should be done infrequently and if it is done proportionally (a slope-invariant linear transformation), maxima do not impact ranking by the arithmetic mean based HDI • High discrimination power is based on the accounted inequality across dimensions which is not as important as the inequality within dimension and across population • No decomposition by dimension nor by subpopulation 16

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• Changing the functional form may cause big changes in the HDI values and ranks especially in the lower end of distribution. Example: LE EDU GNI Stdev HDI (geometric) HDI (arithmetic) Mali . 496 . 270 . 346 . 115 . 359 (175) . 371 (176) Liberia . 580 . 439 . 140 . 225 . 329 (182) . 386 (175) 18

Summary of recommendations 1 • • • Revert to the original arithmetic formula With fixed minima (zeroes) With aspirational cut-offs constrained and updated infrequently With log of income component With fixed cut-offs between groups _____ 1 2 nd Conference on measuring human progress, March 4 -5, New York 19

Thanks Milorad. kovacevic@undp. org 20