Every year, the United Nations releases the Human Development Index.
The HDI is like a country’s report card. In a single number, it tells policymakers and citizens how well a country is doing. This year, Norway was at the top of the class, while Niger finished last.
The index first appeared in 1990. Before then, a country’s level of development was measured solely by its economic growth. By taking non-economic dimensions of human well-being into account, the HDI revolutionized the idea of what was meant by countries becoming “more developed.”
The HDI has been wildly successful in changing the way people think about the development process. However, it still suffers from real flaws. There have been numerous attempts to do its job better, including one that we published on Nov. 6.
Eliminating the flaws in the HDI make a substantial difference. For example, Denmark was ranked fifth in the world according to this year’s UN rankings, but our new index knocks it down to only 27th, switching places with Spain.
Problems with the HDI
Human development can be devilishly hard to measure. The HDI considers changes in three domains: economics, education and health. (One alternative to the HDI, the Social Progress Index, combines data on 54 domains.)
In our view, the HDI has three main problems. First, it implicitly assumes trade-offs between its components. For example, the HDI measures health using life expectancy at birth and measures economic conditions using GDP per capita. So the same HDI score can be achieved with different combinations of the two.
As a result, the HDI implies a value of an additional year of life in terms of economic output. This value differs according to a country’s level of GDP per capita. Dig into the HDI and you will find whether it assumes an additional year of life is worth more in the U.S. or Canada, more in Germany or France, and more in Norway or Niger.
The HDI also struggles with the accuracy and meaningfulness of the underlying data. Average income could be high in a country, but what if most of it goes to a small elite? The HDI does not distinguish between countries with the same GDP per capita, but different levels of income inequality or between countries based on the quality of education. By focusing on averages, the HDI can obscure important differences in human development. Incorporating inaccurate or incomplete data in an index reduces its usefulness.