Approaches to International Comparisons of Human

Development

Beyond GDP• French President Nicolas Sarkozy calls for

commission to study alternative measures of welfare.

Economist Link

FT Link

Critique of GDP as Measure of Welfare

1. Need better measures of economic performance

2. Don’t measure production, measure well-being.

3. Well-being is multi-dimensional and not just about income.

4. Use subjective measures as well as objective measures.

5. Pragmatically measure sustainable economy.

6. Physical measures of environment

Commission on the Measurement of Economic Performance and Social Progress

1. Better Measures of Economic Performance

• Services especially are not adjusted for quality.

• Government services are measured by inputs but quality of outputs is not measured.

• Some expenditures (military, police, security) are defensive and don’t add to welfare.

How do we measure value-added of non-market goods?

• Production of government bodies and non-market institutions is measured at cost.

• Value of housing services of owner-occupied housing valued at imputed rental value, i.e. market rent of similar housing stock.

• Value of non-compensated household work valued at zero.

2. Measure Well Being

A. Measure income and consumption

B. Give More Prominence to Distribution of Income.

C. Incorporate Measures of Leisure

National Income vs. Domestic Income

• Net Factor Income [NFI] is income earned on overseas work or investments minus income generated domestically but paid to foreigners.

GNI GDPGross National Income Gross Domestic Product

= income earned by national residents

= income created within domestic borders.

GNI = GDI +NFI

A. Income vs. Output

UN Main Aggregates Link

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201190.0%

95.0%

100.0%

105.0%

110.0%

115.0%

120.0%

Macau: GDP/GNI

B. Consumption vs. Production

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

5000

10000

15000

20000

25000

Household final consumption expenditure per Capita, PPP

Hong Kong Singapore

Co

nst

ant

2005

in

tern

atio

nal

B. Distribution of Income

• GDP per Capita shows how much income people have if all income were split evenly.

• But income is never split evenly and evenness of division varies across countries.

• Examine the distribution of income

Why?

Rawls: Justice as Fairness• Welfare of all individuals within a society

have a non-negotiable value and must be considered when considering social welfare.

• To consider welfare of all individuals, must consider the system of distribution.

• “Veil of Ignorance” Only pure-hearted way to think about system of distribution is to think about it from the standpoint of someone who does not know where they will fall in the distribution.

• “Difference Principle.” Link

Median Income

• Per Capita Income = Total Income divided by Total Population

• Median Income = Income of the person in the

precise middle of the distribution.

Better representative of the typical person.

Estimating the Median

• Estimate the median by examining the per capita income of people in the middle percentile.

• In China, middle income 20% of the population makes 14.66% of the GDP. Per capita income of the middle is

World Development Indicators China, 2005Income share held by third 20% 14.66GDP per capita, PPP (constant 2005 international $) 4114.57352

.1466 .14660 .

.2 .2t t

t t

GDP GDP3 15 98

POP POP

Distribution of IncomeWorld Development Indicators: 2000-2005

Income share held by

0

10

20

30

40

50

60

70

0 1 2 3 4 5

Quintile

%

China Sweden Brazil

Quintile: Twenty % of the Population

Cumulative Distribution

Quintile China lowest 20% 5.73 second 20% 9.8 third 20% 14.66 fourth 20% 22 highest 20% 47.81

Cumulative0.00% 0

20.00% 5.7340.00% 15.5360.00% 30.1980.00% 52.19

100.00% 100

• What fraction of income is earned by the population below a certain fraction.

Lorenz CurveMapping the Cumulative Distribution

Cumulative Distribution: China 2005

0

10

20

30

40

50

60

70

80

90

100

0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

%

Evenly distributed economy looks like a 45% line

Cumulative Distribution: Perfectly Even Economy

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 20% 40% 60% 80% 100%

%

Cumulative Distribution0% 0%

20% 20%40% 40%60% 60%80% 80%

100% 100%

Gini Coefficient• Size of the gap

between the Lorenz curve is the key measure of economic inequality.

• A country’s Gini coefficient is equivalent to the size of the area between its Lorenz curve and the 45º angle

Lorenz Curve

0

10

20

30

40

50

60

70

80

90

100

0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

%

Perfect China

Estimating the Gini Coefficient

• Size of the Gini Coefficient is the size of the triangle under the perfect Lorenz curve minus the area under a country’s Lorenz curve (multiplied by 2 for normalization)

1. Area under the triangle is (1 x 1)/2 = ½

2. Break the country’s Lorenz curve into trapezoids. Find the area of each trapezoid.

China

0

1

0.5219

0.3019

0.1533

0.0573

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 1 2 3 4 5

%

5 Trapezoids

.2

.2.2.2.2

Quintile

LCq-1

If total range is divided into q = 1,…Q evenly spaced points with LCq = Lorenz cuve at point q, the area of the trapezoid is

LCq

1/Q

1

1 1

2 q qLC LCQ

Ex. q= 4, the 4th Quintile

And

So the area of the 4th of 5 trapezoids is

4 .5219ChinaqLC

3 .3019ChinaqLC

4 3 .5219 .3019.2 .2

2 20.0

LC LC

8238

Estimating the Gini Coefficient3. Add up the area of all the trapezoids

4. Subtract from area of triangle (1/2) than double to normalize

5. Multiply by 100 to get index

11

11 1 2*.30688 .38624

Q

q qq

Gini LC LCQ

38.62GINI

By breaking population into deciles we could get an even more accurate estimate

Country Name GINIBrazil 56.4China 41.5Sweden 25

C. Leisure

• Time Use Surveys National statistical agencies increasingly take surveys of how people are using their time to give a better measure of leisure.

Commission on the Measurement of Economic Performance and Social Progress

France Germany USA Korea Japan Hong Kong

943

1,079

1,174

1,478

1,342

1,573

Hours Worked per Working Age Adult, 2011

3. Multidimensional Measures of Well-being

A. Material living standards;B. Health;C. Education;D. Personal activities including workE. Political Voice and GovernanceF. Social connections and relationshipsG. EnvironmentH. Insecurity

Capabilities as Development

• Economic philosopher Amartya Sen argues that because of diversities of needs and ambitions of people, development should be defined as “advancing richness of human life.” Link

• Sen defines capability: “(i.e. the opportunity to achieve valuable combinations of human functionings — what a person is able to do or be)” Link

Positive Freedom

Measures of Development

FunctioningsThings to Do or

Be That we Value &

Have Reason to Value

ResourcesThings that we

have

CapabilitiesSet of

functionings That might be

achieved

UtilitySubjective

Satisfaction

Money, commodities

Different People value different functionings

Different People require different level of resources to achieve functionings

Activity, roles

Deprivation, Poverty Constraints on Capabilities

Human Development Index

• Under Mahbub al-Haq, UN constructs an index of human development to measure people’s opportunity to make choices abou their lives Link

• Emphasizes health, education and income as proxies for capabilities of achieving functionalities.

Human Development Index• Combine three measures of welfare

1. Income2. Health3. Education

http://hdrstats.undp.org/en/tables/default.html

Create Comparable Index• Compare the value of a development

indicator with its hypothetical or observed maximum and minimum. – Assess how well a country is doing filling the

gap between

actual value - minimum valueDimension Index =

maximum value - minimum value

Scaling variables chosen based on history

http://hdr.undp.org/en/media/HDR_2010_EN_TechNotes_reprint.pdf

Example: Health

0.

actual value - 20 actual value - 20Health Index =

83.2 - 20 63.274.7 - 20 54.7

Malaysia Health Index = 86663.2 63.2

Combine Multiple IndicatorsGeometric Average

• If you have N indicators multiply all of the indices by each other then

1 2 ....NNI I I I

HDI vs. GNI

• Studies quantitative measurements that assess “happiness” often using survey methods which rely on self-reporting on subjective well-being.

• Suppose the top of the ladder represents the best possible life for you and the bottom of the ladder the worst possible life. Where on this ladder do you feel you personally stand at the present time?.

4. Subjective Measures

- 10 - . - .- 0

R. Veenhoven, World Database of Happiness, collection Happiness in Nations Link

Comparisons of Happiness• Happiness research develops many

results for individuals.

WomenPeople with lots of friendsThe young and oldMarried and cohabiting peopleThe highly educatedThe healthyThose with high income

The unemployedNewly divorced and separated people

Andrew Oswald Esmee Fairbank Lecture 2006

Happier Less Happy

Money and Happiness

• Set Point Theory: Everyone has own personal level of happiness which can be temporarily moved by events but not for long. (Short run only).– Focus illusion: People evaluate happiness

relative to some idea. Idea changes with circumstances.

• Capabilities Theory: Money expands freedoms (Long run only)

Easterlin Paradox• Modern international evidence suggests a

strong correlation between GDP per capita and average level of happiness.

• GDP per Person Rises over time, but subjective measures of Well Being do not. Explanation: People get happiness from relative income, economic growth is like a treadmill.

Link

Proto-text: In general, how happy would you say you are?:- very happy- fairly happy- not very happy

Very = 3...not very = 1 USA Happiness: 1 to 3 Point Scale

2

2.05

2.1

2.15

2.2

2.25

2.3

2.35

2.4

1946

1963

1971

1973

1975

1977

1980

1983

1985

1987

1989

1991

1993

1996

2000

2004

2006

Cite as: R. Veenhoven, World Database of Happiness, collection Happiness in Nations, Overview of happiness surveys using Measure type: 111B / 3-step verbal Happiness, viewed on 2011-09-02 at http://worlddatabaseofhappiness.eur.nl

Does Money Buy Happiness

Deaton, Angus, 2008, http://www.nber.org/papers/w13317

World Happiness Report UN Sustainable Development Solutions Network

• Updated data for a variety of “happiness” studies

• World Happiness Report

http://worlddatabaseofhappiness.eur.nl/

Critiques of Subjective Measures

1. Orthodox: Study Revealed Behavior through Actions not Words

2. No precise definition of “happiness” which may have different meaning to different people or across countries or across languages.

3. Measures of happiness may be biased by phrasings or ordering of questions.

4. Is Happiness the purpose of life?

5. Pragmatic Approaches to Sustainable GDP

A. Natural Capital Accounting

B. Green GDP

A. Natural Capital Accounting

• Gross Capital Formation is the Accumulation of Physical Man-made assets.

• Sustainable GDP: Subtract extraction of sub-soil assets from GDP as disinvestment.

• Critique: Also add the accumulation of sub-soil assets

Link

“Green GDPTwo Methods

• EDP1 = GDP - Imputed treatment cost • EDP2 = GDP – Environmental degradation costs

GREEN ACCOUNTING PRACTICE IN CHINA

(Draft Report) April 2008 http://www.caep.org.cn/english/paper/Green-GDP-Accounting-Pratice-in-China-Draft-by-UNEP-Tongji-Team.pdf

6. Physical Measures of the Environment

A. Economic Value of Environmental Damage

B. Millennium Development Goals

Millennium Development Indicators