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

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 Human Development

A standard definition of human development (1990 HDR):

“[…] a process of enlarging people’s choices to live 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”
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• 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

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 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).

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 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

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 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)
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 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

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 How to anchor
  HDI values?
• Through normalized variables
- Necessary for comparability on the same scale.
- Only after rescaling they can be combined into a single scalar – a
composite index.
• Enable each dimension index to range between 0 and 1

- net variable
- reference level (range)
• Cardinal interpretation:
- “Distance” travelled or
- Achievement in % of the reference level

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 How to decide about
  goalposts ?
• Purely data driven goalposts cause confusion
• Ought to have firm normative basis
• Different purpose of goalposts:
- Upper (aspiration level)
- may change periodically but infrequently, 5 – 10 years, normative targets
- In a constrained way (or proportionate)
- All past inconsistencies will then be caused by data revisions
- Lower (natural zeros) should stay fixed

• Properties of the index should not be compromised

- Equal implicit weights (by making the range of variation very similar)

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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

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 Changes in the HDI introduced in 2010
Goal posts
Minima: Maxima: Comments:
Fixed at “natural Observed • A possible change of maxima every year;
zeros” maxima • HDI level of Congo depends on LE of Japan,
since 1980 education in USA and GNI of Qatar (!?)
Group cut-offs (relative)
Cut-offs: Groups: Comments:
Quartiles of HDI Quartile • Little movement mostly within the group
distribution groups of • To move to the higher quartile, another country has
equal size 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)

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 Logarithmic transformation of income
• Diminishing marginal utility of income

GNIpc ln(GNIpc) Log transformation

.00005

.3
.00004

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.2
.00003
Density

Density

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.00002

lngni
.1

8
.00001
0

6
0 20000 40000 60000 80000 100000 4 6 8 10 12
GNIpc lngni 0 20000 40000 60000 80000
kernel = epanechnikov, bandwidth = 3.5e+03 kernel = epanechnikov, bandwidth = 0.3960 GNIpc

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 Logarithmic transformation in other dimensions
• There are 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.
Life Expectancy Log(LE) Log(LE) vs. LE
4
.05

4.4
.04

4.3
3
.03

4.2
Density
Density

lle
.02

4.1
1
.01

4
0

3.9
0

40 50 60 70 80 90 3.8 4 4.2 4.4 4.6

le lle 50 60 70 80 90
kernel = epanechnikov, bandwidth = 2.7427 kernel = epanechnikov, bandwidth = 0.0388 le

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

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  Aggregation: Geometric mean

• No perfect substitutability - reduced substitutability

• Awards well-rounded performance
• Encourages improvements in the weakest dimension
• Changing of maxima does not impact ranking by HDI
• Higher discriminatory power
(0.6, 0.6, 0.6)HDI=0.600,
(0.5, 0.6, 0.7)HDI=0.594,
(0.4, 0.6, 0.8) HDI=0.577
• Accounts for inequality across dimensions

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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

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  Aggregation: Arithmetic mean

• Easy interpretation
• Decomposability by dimension
• Perfect substitutability:
- a low achievement in one dimension is linearly compensated
for by a high achievement in another dimension.
Ex. HDI=0.6: (0.6, 0.6, 0.6), (0.5, 0.6, 0.7), (0.4, 0.6, 0.8)
- Constant tradeoffs between non-income dimension
• Low discriminatory power

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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 HDI
(geometric) (arithmetic)
Mali .496 .270 .346 .115 .359 (175) .371 (176)
Liberia .580 .439 .140 .225 .329 (182) .386 (175)

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 Summary of recommendations1

• 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 2nd Conference on measuring human progress, March 4-5, New York

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 Thanks
Milorad.kovacevic@undp.org

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