The concept of ‘Development’ has fascinated many economists around the world, from Adam Smith, Marx and Keynes to Amartya Sen and Devraj Ray. The wealthy nations across the world and international organisations such as the United Nations and World Bank are all showing great interest in resolving the developmental challenges confronted by the underdeveloped and developing countries of the world.
While the rich nations are now focusing on sustainable development, the poor countries are striving towards achieving economic development.
Economists have developed various measures to assess the development of a nation like Gross National Income, Per Capita Income, Human Development Index, Physical Quality of Life Index and so on. One of the most important and a simple measure of economic development among them is per capita income.
1. Per Capita Income:
Per capita income refers to the average income earned per person in a given region or country during a specified year. It is obtained by dividing the country’s national income by its population.
Per capita income is generally treated as the indicator of development of a country. The basic idea behind this is that development is based on the level of income of the residents of a country. Higher the income, higher is the standard of living and development. Though, national income can also be used as an indicator for economic development, it has numerous drawbacks.
It fails to take into account the growth rate of population and changes in price level. Failure to distinguish between final and intermediate goods may be misleading while calculating the national income. To overcome these challenges, per capita income has been suggested as a measure to assess the economic development.
However, even per capita income cannot be considered as an adequate measure of economic development due to the following reasons:
1. Development refers to an increase in the standard of living of the people. Welfare and standard of living of the people improves only with an increase in consumption expenditure. An increase in the per capita income does not necessarily mean development because people may be increasing the rate of savings with increase in the income and therefore, the consumption may remain the same or it may even fall.
2. When the government spends the increased income on acquiring military goods or on other non-developmental expenditure which does not result in increased welfare of the people, the per capita income figure may be misleading.
3. The per capita income estimates do not take into account the distribution of income. It is only a simple average.
4. It fails to measure the changes in output due to changes in price level.
5. The cost of living varies across the countries and consumers’ needs and preferences also differ in each country. Thus, the per capita income of different countries cannot be compared. Further, international comparison may become misleading and inaccurate when per capita income figures of different countries are converted to a common currency.
6. Per capita income also does not reflect the development in social infrastructure such as basic nutrition, health, housing infrastructure, sanitation facilities, education, etc. These facilities are essential for improvement in the living standards of the people.
Despite these limitations, per capita income is still a popular measure of development due to its simplicity and ease of calculation. And, it is also a known fact that countries that have a low per capita income are generally underdeveloped with poor social and economic infrastructure and low standard of living.
2. Quality of Life Index (QLI):
Quality of Life Index, popularly known as the ‘where-to-be-born-index’, measures which country provides the best opportunity in terms of health, safety and a prosperous life. The index is based on the factors which assess quality of life.
These factors include:
1. Material well-being, as measured by GDP per capita.
2. Health, as measured by life expectancy at birth.
3. Quality of family life, as measured by divorce rates.
4. Political freedom.
5. Job security which is measured by the unemployment rate.
6. Gender equality.
8. Quality of community life, which is based on membership in social organisations.
9. Physical security which is based on crime rates, terrorism and homicides, and
10. Governance, as measured by the prevalence of corruption.
When a survey was carried out among 80 countries in 2013 on the above indicators. India ranked 66th with a score of 5.67 out of 10 and China ranked 49th with a score of 5.99 out of 10. The top rank was secured by Switzerland (8.22 out of 10) followed by Australia (8.12 out of 10) and Norway (8.09 out of 10).
3. Physical Quality of Life Index (PQLI):
The PQLI, developed by Morris D. Morris, measures the quality of life in a country based on three indicators namely- life expectancy, infant mortality rate and literacy rate. Each of these indicators is measured on a scale of 1 to 100, where 1 indicates worst performance and 100 indicates best performance.
The country with the highest life expectancy is rated 100 and the one with the lowest is rated 1. The other countries fall in between 1 to 100. For example, if Norway has the highest life expectancy of 90 years it is given a rating of 100 and if Sudan has the lowest life expectancy of 25, it is given a rating of 1. If in Saudi Arabia, life expectancy is, say 57 years, this is exactly in between 90 and 25 and therefore, it would be given a rate of 50.
The final index is the average of the three indices considered for computing the PQLI. The PQLI was, however, subjected to severe criticism from economists as it failed to include many other social and psychological factors. Further, the index gives equal weightage to all the three indicators which are unrealistic.
4. Human Development Index (HDI):
Human Development Index was developed by Mahbub-ul-Haq and Nobel Laureate, Amartya Sen and was incorporated by the United Nations Development Program (UNDP) in their first Human Development Report in 1990. HDI was developed as a composite statistic that considers three social indicators life expectancy, education and per capita income of the countries. It measures the achievement of the country in these three basic dimensions.
1. Life Expectancy at Birth:
Life expectancy has been considered as an important indicator due to the value that people attach to living a long and healthy life. People can survive for very long if they are well nourished, healthy and educated. Life expectancy at birth measures the number of years a new-born infant would live if prevailing patterns of mortality at the time of its birth continues to remain throughout its life.
2. Literacy Rate:
Literacy rate measures the percentage of population, aged 15 years and above, who can with understanding read and writes simple statements in daily life. The literacy rate reflects people’s access to education. A literate person can lead a productive and quality life.
3. Per Capita Income:
Per capita income assesses the standard of living of the people and is another important indicator of economic development. The per capita income reflects one’s command or claim over resources.
Before calculating the HDI, an index is created for each of these dimensions called— Life expectancy index, education index and income index. The goal posts are used to calculate the dimension index. The performance of the country in each of the dimension is expressed as a value that ranges between 0 and 1.
The following formula is used to calculate each of these indices:
HDI is now calculated as a simple average of the three dimension indices. The HDI value ranges from 0, which is the minimum value to 1, which is the maximum value. Countries which have a HDI value of less than 0.5 are considered as countries with low human development. Countries with HDI value between 0.5 to 0.8 are considered as countries with medium level of human development and countries with HDI value of more than 0.8 are considered as countries with high level of human development.
According to the UNDP’s Human Development Report of 1990, India’s HDI value was 0.428.
The Education Index:
Before 2010, education index was calculated by taking into consideration adult literacy rate along with combined primary, secondary and tertiary gross enrolment ratio. The Gross Enrolment Ratio (GER) is a statistical measure used to determine the number of students enrolled at elementary, middle and high school.
It is expressed as a ratio of number of students who live in the country to those who qualify for that particular grade.
For instance, if a country has 1, 00,000 people enrolled in school during the academic year 2008 and the total number of school age individuals are 1, 50,000, then GER is calculated as follows:
GER = 100000 / 150000 = 0.66
However, since 2010, the education index is calculated based on the mean years of schooling and expected years of schooling.
1. Mean years of schooling refers to the average years of formal education received by people aged 25 years and above, during their lifetime.
Formula to calculate Mean Years of Schooling Index (MYSI) is:
2. Expected years of schooling refer to the years of schooling a child can expect to receive under current enrolment rates.
Formula to calculate Expected Years of Schooling Index (EYSI) is:
Education index is then calculated as:
The Income Index:
Where, GNI stands for Gross National Income.
The income index would be 1, if per capita income is the highest and 0, if it is the lowest, that is, USD 100.
The Life Expectancy Index:
Calculation of Human Development Index:
HDI is calculated as the geometric mean of the three indices.
The Goal Posts for Human Development Report of 2010 were as follows:
The example given below shows the calculation of Human Development Index for China based on its performance in HDI indicators.
Limitations of HDI:
Human Development Index has evolved over the years, and yet, it has certain limitations:
1. It is a composite index that tries to capture human development in just a single number which is unrealistic.
2. Many vital indicators such as infant mortality, health status, access to drinking water and sanitation facilities etc. are not measured by this index.
3. When all the countries improve their HDI value at the same weighted rate then the countries which had very poor HDI values earlier may not be recognised for their improvement.
4. Equal importance given to all the three indicators may be arbitrary.
5. Prevalence of inequality, unemployment, etc. is not captured by this index.
According to Amartya Sen, the standard of living of a society cannot be judged merely by its per capita income, it should rather be measured by people’s capabilities, that is, by what a person can do. Development is, thus, a broad concept that goes beyond income and other material goods.
It encompasses a variety of human capabilities such as access to drinking water, health care facilities, education, housing, employment and so on. The HDI, thus, provides only a foundation to the measurement of development of an economy.
India and the HDI:
India was ranked 131 out of 188 countries according to UN Human Development Report, 2016, based on 2015 data with a score of 0.624. In 2010, India ranked 119 out of 169 countries with a score of 0.58. While India’s HDI value increased from 0.428 in 1990 to 0.624 in 2016, it still had the lowest rank among BRIC nations.
Yet, its annual average growth rate, during the same period, has been higher that of other medium HDI countries. Prevalence of high levels of inequality could be cited as one of the prime reasons for the India’s low rank in HDI. However, with several measures taken on the fiscal front by the present government, high hopes have emerged on India’s developmental prospects.