Measures of Development

You may know that countries are sometimes classified as developed, developing, or emerging. But what does this classification mean? How is a country's development measured? This explanation will cover economic development and how economists measure it.

What is economic development?

As an economics student, you are must be definitely familiar with economic growth. But what is economic development? Is it the same as economic growth?

No, they don't mean the same thing.

Fundamentally, economic development is about the expansion of people's capabilities (people development) over time. Therefore, economic development goes beyond increasing the income and output associated with economic growth and also takes into account poverty reduction and income redistribution.

Economic growth is important for economic development: the more goods and services produced, the more likely the standard of living is to improve. Nevertheless, there is no guarantee that an economy experiencing economic growth will also experience economic development.

What are some developmental measures?

There are a few developmental measures. They are:

• HDI - Human Development Index.
• HPI - Human Poverty Index.
• Multidimensional Poverty Index.
• GPI - Genuine Progress Indicator.

Just as there are indicators to measure and quantify economic growth, the same is true for economic development.

Measurement of economic development: The Human Development Index (HDI)

The measurement of economic development can be done through the human development index (the HDI).

This is the most used index to measure economic development. It takes the following three factors into account:

1. Health. The HDI measures the average life expectancy in a specific country and compares it to the global average.
2. Education. The HDI measures the mean years of schooling and expected years of schooling in a country.
3. Standard of living. The HDI measures the gross national income (GNI) per head, using the principle of purchasing power parity, PPP.

In determining the HDI, each component has an equal weighting of 33%. The closer the HDI is to 1, the more developed the country is.

The table below shows the top five countries with the highest HDI ranking with their GDP and GDP per capita rankings.

Table 1. HDI, GDP and GDP per capita ranking.

As you can see, despite these countries having the highest ranking in terms of economic development, they do not maintain the highest ranking in GDP, and there is a disparity in GDP per capita which is an indicator of economic growth. This illustrates how a country's level of income and output does not directly translate to a high level of economic development.

Strengths of the HDI

As the HDI is the most commonly used measure of economic development, it has many strengths:

• Reliable. The information is updated on an annual basis and sourced reliably.
• Accurate. The HDI is superior to single indicators as it uses two types of social data (health and education) along with one type of economic data, which gives a broader perspective.
• Useful. The HDI is a very useful tool for governments aiming to devise policies focusing on economic and human development.

Weaknesses of the HDI

These are the main weaknesses of the Human Development Index as a measure of development:

• Simplicity. It has been criticized for being too simple and therefore unable to give a real representation of the level of development in an economy. This is backed by the argument that economic and human development are broader concepts with far greater dimensions than the ones captured in the HDI.
• Not equally weighted. All the factors used to calculate a country's HDI have equal weight, but there is a concern that wealth (GNI) still has too much weight in the HDI. This fact leaves room for richer countries to artificially manipulate their rankings. In addition, the GNI does not take into consideration the hidden economy which tends to make up a larger proportion of less developed countries' economies.

Some other criticisms that the HDI as a development measure has received are:

1. A long-life expectancy is not equivalent to a high quality of life.

   Someone with a high life expectancy could be working a high-risk job for less than average pay.

2. The number of years people spend in school doesn't accurately measure the quality of the education they receive.

3. The HDI alone does not measure the extent of inequality in a country. It is possible to have a satisfactory HDI rank and a huge income gap between the very wealthy and the very poor.

4. The HDI fails to give an account of whether the development is sustainable.

   Country Y might be experiencing economic growth and improved living standards, but issues such as pollution and corruption remain.

Measurement of economic development: The Genuine Progress Indicator (GPI)

The Genuine Progress Indicator builds off GDP as an economic indicator by including measures of the impact of economic growth on the environment as well as various social factors. The GPI takes GDP into consideration while also measuring the negative impacts of growth.

Measurement of economic development: The Human Poverty Index (HPI)

The Human Poverty Index complements the HDI as it is an indication of the standard of living in an economy. It considers the level of poverty and deprivation of a community in a country. The HPI uses two indices:

1. The HPI-1 is used to measure developing countries.
2. The HPI-2 is used for developed countries that are part of the Organization for Economic Co-operation and Development (OECD).

The HPI has limited utility as it combines the average deprivation levels of each dimension and it can’t be linked to any particular group of people.

Measurement of economic development: The Multidimensional Poverty Index

The MPI replaced the HPI in 2010. It differs from the HPI as it assesses poverty at the individual level.

Economic happiness and economic growth

Can be happiness linked to economic growth? In economics, measuring happiness is very subjective. This would involve the evaluation of a wide range of factors that affect wellbeing, quality of life, and self-reported levels of happiness.

Some of these factors are:

• Income

The Gross Domestic Happiness Index

Despite the number of factors that impact happiness and how subjective it is, there is an index that economists use to measure happiness: the Gross Domestic Happiness (GDH) index.

From the neoclassical economic perspective, higher income levels correlate with higher levels of utility and economic welfare, as a person is more able to purchase the goods and services (food, shelter, healthcare, and education) that would improve their quality of life.

‘Happiness’ is a complicated concept to quantify for measuring purposes, but many economists claim 'psychological surveys' can give a reliable measure of the level of happiness or satisfaction people are experiencing in their lives.

Does economic growth increase happiness?

As for the relationship between happiness and economic growth, the Easterlin Paradox pokes a hole at it. Upon attaining a certain level of per capita income developed countries failed to increase happiness according to the national happiness polls.

According to this paradox, it would seem that a person's absolute income whilst living in a rich country is not as important as their relative income. Therefore, people were more concerned with being 'comparatively better off than those around them' than simply having money.

In 2008, Betsey Stevenson and Justin Wolfers refuted this paradox, claiming that there was in fact a genuine connection between GDP per capita and happiness.

Other reasons why a rising GDP may not lead to increased happiness include the fact that the allocation of resources for the purpose of economic growth may bring about negative costs to society, which will impact its happiness levels.