Approaches to International Comparisons of Human Development

1. Approaches to International Comparisons of Human Development

2. Beyond GDP • French President Nicolas Sarkozy calls for commission to study alternative measures of welfare. FT Link Economist Link

3. Critique of GDP as Measure of Welfare Commission on the Measurement of Economic Performance and Social Progress • Need better measures of economic performance • Don’t measure production, measure well-being. • Well-being is multi-dimensional and not just about income. • Use subjective measures as well as objective measures. • Pragmatically measure sustainable economy. • Physical measures of environment

4. 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.

5. 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.

6. 2. Measure Well Being • Measure income and consumption • Give More Prominence to Distribution of Income. • Incorporate Measures of Leisure

7. A. Income vs. Output Commission on the Measurement of Economic Performance and Social Progress

8. Consumption vs. Production

9. 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?

10. 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

11. 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.

12. 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

13. Distribution of IncomeWorld Development Indicators: 2000-2005 Quintile: Twenty % of the Population

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

15. Lorenz CurveMapping the Cumulative Distribution

16. Evenly distributed economy looks like a 45% line

17. 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

18. 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) • Area under the triangle is (1 x 1)/2 = ½ • Break the country’s Lorenz curve into trapezoids. Find the area of each trapezoid.

19. 5 Trapezoids .2 .2 .2 .2 .2 Quintile

20. 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 Ex. q= 4, the 4th Quintile And So the area of the 4th of 5 trapezoids is LCq LCq-1 1/Q

21. Estimating the Gini Coefficient • Add up the area of all the trapezoids • Subtract from area of triangle (1/2) than double to normalize

22. Multiply by 100 to get index By breaking population into deciles we could get an even more accurate estimate

23. 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.

24. Commission on the Measurement of Economic Performance and Social Progress

25. 3. Multidimensional Measures of Well-being • Material living standards; • Health; • Education; • Personal activities including work • Political Voice and Governance • Social connections and relationships • Environment • Insecurity

26. Capabilities as Development • Economic philosopher AmartyaSen 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

27. 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.

28. World Health Organization Global Health Observatory

29. Human Development Index • Combine three measures of welfare • Income • Health • Education http://hdrstats.undp.org/en/tables/default.html

30. 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

31. Scaling variables chosen based on history http://hdr.undp.org/en/media/HDR_2010_EN_TechNotes_reprint.pdf

32. Example: Health

33. Combine Multiple IndicatorsGeometric Average • If you have N indicators multiply all of the indices by each other then

34. HDI vs. GNI

35. Education • Literacy Rates: WDI • Years of Education Barro-Lee Dataset Link • Quality of Education: OECD Programme for International Student Assessment (PISA) LinkSummary Data

36. 4. Subjective Measures • 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?. - 10 - . - .- 0 R. Veenhoven, World Database of Happiness, collection Happiness in Nations Link

37. Comparisons of Happiness • Happiness research develops many results for individuals. Less Happy Happier Women People with lots of friends The young and old Married and cohabiting people The highly educated The healthy Those with high income The unemployed Newly divorced and separated people Andrew Oswald Esmee Fairbank Lecture 2006

38. 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)

39. 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

40. Proto-text: In general, how happy would you say you are?:- very happy- fairly happy- not very happyVery = 3...not very = 1 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

41. Does Money Buy Happiness Deaton, Angus, 2008, http://www.nber.org/papers/w13317

42. Updated data for a variety of “happiness” studies http://worlddatabaseofhappiness.eur.nl/

43. Critiques of Subjective Measures • Orthodox: Study Revealed Behavior through Actions not Words • No precise definition of “happiness” which may have different meaning to different people or across countries or across languages. • Measures of happiness may be biased by phrasings or ordering of questions. • Is Happiness the purpose of life?

44. Positive Psychology • …is “the scientific study of the strengths and virtues that enable individuals and communities to thrive.” Link • Seligman emphasizes Well Being Theory • Positive Emotion (Happiness) • Engagement (Focus on What you are doing) • Relationships (Other people) • Meaning (Purpose) • Accomplishment Link

45. 5. Pragmatic Approaches to Sustainable GDP • Natural Capital Accounting • Green GDP

46. 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

47. “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

48. LINK

49. 6. Physical Measures of the Environment • Economic Value of Environmental Damage • Millennium Development Goals

50. Millennium Development Indicators