Tuesday, October 06, 2009

A quick note on HDI 

I hope I get to visit with John Hinderaker soon about his post on the UN's Human Development Index (HDI). People who have seen our book on measuring development know my co-author Bryan Roberts has written a wonderful, scathing review of HDI. There are problems in terms of the boundedness of some of the variables -- you can't have a literacy rate over 100%, for example. Additional income is converted to utility by taking the logarithm of per capita GDP. Bryan argues for a measure that combines longevity of life with (logged) per capita income and with proper discounting to get a measure of welfare. But getting education in the mix is difficult. Higher education increases income directly, but higher education of my neighbors supposedly makes my life better too. The best way to get a high "educational attainment score" is to make all your citizens into students. That may provide us lots of waiters and waitresses, but not much food.

Bryan Caplan also wrote against HDI, making several of the same points. These are widely known problems within the economics profession (and particularly to development economists, few of whom use HDI in empirical analysis.) But Bryan Roberts notes, I think correctly:
It seems strange that the HDI has been so strongly criticized in the academic profession and yet continues to enjoy such a high degrees of public prominence. One reason that helps explain this is that many intuitively believe that GDP is an incomplete measure of welfare, and the HDI attempts to construct a better measure of welfare that incorporates highly plausible non-income variables.
And Bryan Caplan notes that the way this is done is to use a measure that tells us how Scandinavian a country is; this seems to be the motivation that John finds in HDI. Let's put it this way: If Denmark (or Finland, Norway or Sweden) is so much happier than we are, why is their suicide rate higher?