An Ordinary Person’s Guide to the Human Development Index

(or why GDP per capita (PPP) is a poor measure of development)

Until recently (well over 20 years now, I think though I’d not want to be held to that since most of my sources for this continue to languish in a garage in the U.S.) Gross Domestic Product (GDP) per capita was widely used as the leading indicator for international development.

At least I understand it, the theory ran along the lines that GDP per capita is a measure of economic activity – and the more economic activity per capita the higher the standard of living in that nation. GDP per capita was used as a proxy measure for quality of life and standard of living – because the latter is harder to measure.

Unfortunately, using GDP per capita as a measure of development without any adjustment works spectacularly badly, for the fairly obvious reason that relative price of goods and services varies between nation states – and these variations in prices levels are not uniform. So in some nations, for example, goods like water may be very cheap – much cheaper than getting a regular haircut – while in others, water may be a major component of household expenditure. Such variations make meaningful comparison of development using GDP per capita as the measure – well – not terribly meaningful.

This difficulty can be addressed by adjusting GDP per capita figures to yield purchasing power parity (PPP). So far as I understand it, one does this by:

1. identifying comparable ‘baskets of goods;’
2. looking at what these comparable goods cost in different nations and;
3. using this information to adjust GDP per capita.

The whole process is complicated because the ‘basket of goods’ has to be comparable not identical. While that may seem counter-intuitive it does make sense – using an identical basket of goods across nation states ignores variations in basic things like dietary staples which are exactly the kind of goods that must be included in the comparable baskets! In other words, calculating PPP across all nation states is an inherently imprecise and complicated piece of economancy involving considerable mucking about with price indexes (which can themselves be very volatile in some nations). Nevertheless, the result is much preferable to the use of unadjusted GDP per capita as a measure – which is why any time that you hear GDP per capita being compared, it is worth seeking clarification about whether the value has been adjusted for purchasing power parity. Mostly it will – even the CIA World Fact Book uses PPP adjustments in its GDP calculations – but if it has not been, add several very large grains of salt and stir.

Unfortunately, adjusting for PPP doesn’t bring GDP per capita into the realm of sensible proxy measures for development. Here’s why:
• GDP per capita is an overall measure of economic activity – and economic activity can be generated by behaviours, events and occurences directly inimical to development. For example, manufacturing and exporting weapons, cleaning up after human-made environmental disasters and providing health care for those sickened or harmed by warfare, environmental mis-management and violent crime all generate economic activity – but in development terms such activities, at best, involve a kind of catch-up.
• GDP per capita provides no information about the distribution of wealth and resources among people living within the nation. GDP per capita (PPP) used as a single measure of development is incapable of distinguishing between nations where a few people are very wealthy and the rest absolutely destitute and nations where nobody is very wealthy and nobody absolutely destitute. The ability to make such distinctions is desirable to those interested in the politics of development for very obvious reasons.

So, if you hear GDP per capita (PPP) being used as an isolated measure of development, you should also add several very large grains of salt and stir.

All of which is by way of a long-winded introduction to a much better, more direct – but also more complex – way of measuring human development: the Human Development Index.

Devised by economist Mahbub ul Haq in 1990 and used by the United Nations Development Program since 1993, the Human Development Index (updated annually) is a Herculean effort to measure living standards and quality of life directly, in a way that allows meaningful international comparisons. Mahbub ul Haq thought such an index was needed because:

“The basic purpose of development is to enlarge people’s choices. In principle, these choices can be infinite and can change over time. People often value achievements that do not show up at all, or not immediately, in income or growth figures: greater access to knowledge, better nutrition and health services, more secure livelihoods, security against crime and physical violence, satisfying leisure hours, political and cultural freedoms and sense of participation in community activities. The objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives.”

In light of this, the HDI rankings are based on a composite index of which GDP per capita (PPP) is only one of the measures considered. As the Readers Guide and Note to Tables states, the HDI measures:

“. . . the average achievements of a country in three basic dimensions of human development: a long and healthy life as measured by life expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross enrollment ratio for primary, secondary and tertiary schools; and a decent standard of living as measred by the Gross Domestic Product (GDP) per capita in purchasing power parity (PPP) U.S. dollars.”

HDI acknowledges that the concept of human development is broader than that captured by even its composite index and in light of this provides a wide variety of additional indicators that may be used to contextualise the annual HDI rankings. The full list of supporting  indicators includes measures such as adult female literacy, other composite indexes such as the Gender-related Development Index, public health indicators such as the percentage of population immunised against common diseases, and distribution measures such as the ‘share of income or consumption (richest 10%). Personally, one of my favourite supporting indicators is the GPD per capita (PPP US $) – HDI rank – on which more in a moment.

Why does any of this matter to anti-imperialists / anti-exceptionalists?
Well – it’s said that either you do politics or politics will do for you. The value of comparable international development data is that it lets us start to get a handle on what kinds of policies promote human development – and what kinds of policies do not. If we ever make it out of Jersey (aka the nation-state system) such information may prove to have its uses. And for those of us with a partisan and/or personal interest in opposing empires, imperialism, exceptionalism and colonialism (four words for what is essentially the (im)moral position that people from some parts of the world are less than human) the HDI is a powerful tool for debunking the Huntingdonesque, the exceptionalist and the imperialist.

Let me supply an example which may even be topical for some readers.

In terms of the straight HDI, the following nations are ranked as follows (with values in parentheses):
U.S.: 8 (0.94
Mexico: 53 (0.821)
Saudi Arabia: 76 (0.777)

The GDP per capita (PPP) – HDI ranking indicator is essentially a measure of ‘what one does with what one has.’ A negative score means that a nation is doing less well in terms of life expectancy and education than one might expect given its GDP per capita (PPP) while a positive score means a nation is doing better than one might expect based on GDP per capita (PPP) alone.

U.S. -6
Mexico +7
Saudi Arabia -31.

Albeit on a very broad brush kind of level, this suggests that, overall, Mexican governmental policies and practices do a better job of translating Mexico’s (admittedly lower!) GDP per capita into increased life expectancy and access to education for those living in Mexico, than do the governmental policies and practices of the U.S and its unfortunate client state Saudi Arabia.

Anyway.

To put it bluntly, HDI was one of the great inventions of the twentieth century. (Were there any justice in the world, everyone would know of Mahbub ul Haq. But there’s not.) And HDI continues to be one of the worlds’ major feats of international cooperation. Because of the largely unsung efforts of thousands of statisticians around the globe, the velvety richness of the data used to support HDI is freely available to everyone who is literate in English (though summary data is available in a wide range of other languages) and numerate who has access to the internet. For those of us who want social justice, HDI is one of the powerful sources of evidence at our disposal. It’s a beautiful, precious thing. Use it.