Constructing composite indices Amie Gaye, Policy Specialist UNDP

1. Constructing composite indices Amie Gaye, Policy SpecialistUNDP/HDRO

2. Structure of presentation Why composite indices Characteristics of a good composite indicator Key steps in constructing composite indices Country examples (adapting the HDI & new index Conclusion

3. What is a composite index/ indicator (CI)? a value derived from a combination of various indicators � based on a theoretical model of a multi-dimensional concept that is being measured Not an end in themselves

4. Why use composite indices When well constructed: Ability to summarize multi-dimensional issues to support policy decisions Easier to interpret than finding trend in separate indicators Ease communication with the general public

5. Characteristics of a good CI Conceptually clear Policy relevant Measurable components Methodologically simple and transparent Easy to interpret

6. Key steps in constructing a composite index Theoretical model- what is poorly defined is poorly measured Selecting indicators A composite index is the sum of its parts quality depends largely on quality of underlying indicators Analysing the component indicators Treatment of missing data- these can bias results Case deletion Imputation

7. Steps in constructing a composite index Normalising: Avoid adding apples and pears Re-scaling (HD approach, 0;1) Setting goalposts �national specific context should inform decisions What is the current situation? Where does the country want to go? How feasible is the goal based on current trends?

8. Steps in constructing a composite index Long & healthy life Knowledge A decent standard of living Income maximum average annual growth rate of 2% in per capita income of the highest group in the country for the next 50 years Minimum could be set at 30% or 50% of mean income per capita (accounting for sub-group difference) Use of PPP not necessary

9. Steps in constructing a composite index Weighting & aggregation Weighting is based on value judgment Equal weighting implies equal importance (HDI) Geometric (power) averaging places greater weight on components with higher values (HPI) Choice should be consistent with theoretical model Document weighting procedures

10. Steps in constructing a composite index Testing robustness of the CI Uncertainty imposes a limit on the confidence of an index. Sensitivity and uncertainty analysis assessment of uncertainties associated with the index Document and show results of analysis

11. Steps in constructing a composite index Links to other variables Good practice - examine correlation between other variables measure explanatory power of the index high correlation suggests high quality CI. 9. Deconstructing Determine contribution of each component indicator to the index

12. The Gambia 1997: School life expectancy Costa Rica 2005: security index for each of the 80 cantons (cantonal security index); and adjusts each region�s HDI with the security dimension Thailand 2003 constructs a new index: human achievement index Seven dimensions 40 indicators

13. Things to be aware of: Poorly constructed CI sends misleading policy messages CI may lead politicians to draw simplistic policy conclusions � analyse the components making up the index: bring out which dimension needs improvement most Scope for disagreement among different groups- countries, local government officials, etc.

14. Limitations of the HDI Only a basic measure of HD Other important dimensions are not measured Not useful for monitoring impact of short term policy changes Mixture of stock and flow variables � partially measures outcomes of past efforts: Adult literacy rate is a stock variable, GDPpc is flow

15. Conclusion Involve people with expertise; Keep it simple- too many dimensions, too difficult to interpret; Lack of sensitivity analysis undermines confidence in CI so be rigorous CHECK for ROBUSTNESS! No matter the scientific basis, CI acceptance relies on negotiation and peer acceptance. Be inclusive Subject your work to peer review!