## 22 December, 2009

### Human Development Index - What is it?

Some months ago, I had an argument with a businessman about the importance of GDP growth. He claimed that it is fundamentally important to a nation's wellbeing, whereas I claimed that after a certain limit, extra GDP really doesn't create more wellbeing. More sharply, he seemed to think that material wealth and wellbeing were pretty much the same thing. I couldn't have disagreed more.

Anyway, the whole confrontation got me thinking about measuring wealth and wellbeing, especially regarding socio-economical circumstances and the equality of citizens. As a result, I started thinking about HDI, as I remember that it was the abbreviation for Human Development Index. However, apart from the name I had no idea what it was about. So, a little research was due. The point of sharing this is purely the fact that I found this a very interesting subject, and hope to spark someone else's imagination as well.

What is it used for?
HDI is, as the name suggests, an index, valued from 0 to 1. UN makes yearly calculations of the index and publishes the list of countries sorted by HDI. It serves as a rough estimate of the socioeconomical situation in the country and can be used to evaluate, how good the circumstances in a given country are for the purposes of having a long, healthy and economically stable life.

How is it computed?
HDI is a composite index, consisting of three components:
• life expectancy index
• education index
• standard of living index (GDP index)
The subindices are computed as below:
source: http://en.wikipedia.org/wiki/Human_Development_Index
• Life Expectancy Index = $\frac{LE - 25} {85-25}$
LE = Life Expectancy (in years)

• Education Index = $\frac{2} {3} \times ALI + \frac{1} {3} \times GEI$

• Adult Literacy Index (ALI) = $\frac{ALR - 0} {100 - 0}$
ALR = Adult Literary Rate (in percentage)

• Gross Enrollment Index (GEI) = $\frac{CGER - 0} {100 - 0}$
CGER = Combined Gross Enrollment Rate (in percentage)

• GDP = $\frac{\log\left(GDPpc\right) - \log\left(100\right)} {\log\left(40000\right) - \log\left(100\right)}$
GDPpc = Gross Domestic Product per capita (in USD)

After the subindices have been calculated, HDI is established simply by taking the arithmetic mean of the subindices, meaning

HDI = (LEI + EI + GDP) / 3

Further applications
As a single idex value, HDI is not really all that informative. It only measures the average human development in a country, and reveals nothing about problems relating to socioeconomical inequality related to race, gender or place of living, for example. That's why UN calculates also disaggregated HDI values, meaning HDI indices that are calculated for coherent groups in a country, separated by race, for example. Obtaining the disaggregated HDI values for groups separated in different ways can reveal a lot of useful information about the equality in a country, and can potentially tell which groups are left outside the social security system and which are doing better.

Problems
Naturally, HDI has its problems. Unless the disaggregated values are computed, it reveals nothing about social equality. Neither does it take into account environmental development in any way. The exploitation of the environment usually only increases a country's GDP, as environmental protection incurs costs on businesses and therefore lowers GDP. As most environmental exploitation is (thank goodness) not dangerous enough to affect the life expectancy of citizens it completely avoids HDI analysis.