Human Development Index

The Human Development Index (HDI) is a composite statistic of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development. A country scores higher HDI when the lifespan is higher, the education level is higher, the GDP per capita is higher, the fertility rate is lower, and the inflation rate is lower. The HDI was developed by the Pakistani economist Mahbub ul Haq working alongside Indian economist Amartya Sen, often framed in terms of whether people are able to "be" and "do" desirable things in their life, and was published by the United Nations Development Programme.

The 2010 Human Development Report introduced an Inequality-adjusted Human Development Index (IHDI). While the simple HDI remains useful, it stated that "the IHDI is the actual level of human development (accounting for inequality)," and "the HDI can be viewed as an index of 'potential' human development (or the maximum IHDI that could be achieved if there were no inequality)."

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Does economic growth bring increased happiness?

Increasing the rates of economic growth has long been the holy grail of conventional economics and politics. To a large extent, most developed economies have been highly successful in increasing economic output. But, has such an impressive increase in national output actually improved people’s standard of living?

To decide whether economic growth has increased happiness is highly subjective, and it is difficult for economists to make concrete arguments. However, it is worth noting the various side effects of growth and consider there impact on general living standards.

Benefits of economic growth

1. Increased consumption

Consumers can benefit from consuming more goods and services. An assumption of economics is that consumption is related to utility, so in theory, with higher consumption levels, there is greater prosperity.

2. Improved public services

With increased tax revenues the government can spend more on important public services such as health and education. Improved health care can improve quality of life through treating diseases and increasing life expectancy. Increased educational standards can give the population a greater diversity of skills and literacy. This enables greater opportunity and freedom. Education is seen as an important determinant of welfare and happiness.

3. Reduced unemployment and poverty

Economic Growth helps to reduce unemployment by creating jobs. This is significant because unemployment is a major source of social problems such as crime and alienation. However, despite rapid increases in economic growth since the Second World War, areas of high unemployment in the EU remain. For example, in France and Spain there are currently high levels of structural unemployment.  This kind of unemployment may not be reduced by economic growth.

Why economic growth may not bring increased happiness

1. Diminishing returns

If a section of the population is living in absolute poverty, economic growth enables people to have higher incomes and therefore they will be able to afford the basic necessities of life such as; food, and shelter. When economic growth can overcome this type of poverty there is a clear link with improved living standards. However, when incomes increase from say $35,000 a year to $36,000 the improvement in living standards is harder to justify. Diminishing marginal utility of income and wealth is a basic economic concept, which suggests the tenth unit of a good will give much less satisfaction than the first. If we already have 2 cars, does our living standards really improve if we now have the capacity to own 3 cars? Often as economic growth increases incomes, people increasingly save their money (higher marginal propensity to save) this is basically because they struggle to find anything meaningful to spend their money on.

2.Externalities of growth.

Economic Growth with involves increased output causes external side effects, such, as increased pollution. Global warming from pollution is becoming a real problem for society. The economic and social costs could potentially be greater than all the perceived benefits of recent economic growth. However, it is worth noting that economic growth doesn’t necessarily have to cause pollution. The benefits of growth could be used to develop better technologies that create less pollution. It is just at the moment this has been a low priority.

2. Economic growth can cause increased inequality.

It is perhaps a paradox that higher economic growth can cause an increase in relative poverty. This is because those who benefit from growth are often the highly educated and those who own wealth. In 1980s and 1990s higher growth in the UK and US has resulted in increased inequality. (1) However, it depends on how growth is managed; economic growth can be used to reduce inequality, for example the economic growth which occurred in the 50s and 60s helped reduce inequality.

3. Increase in crime and social problems

It is another paradox that as incomes increase and people are better off the level of crime has increased as well. (2) This suggests that crime is not motivated by poverty but perhaps envy. One reason why crime rates increase is that quite simply there are more things to steal. Back in the 1930s auto theft, mobile phone theft e.t.c were rare or non-existent. Economic Growth has created more goods to steal. However the link isn’t absolute for example in recent years crime rates in US have reduced from their peak. But there has been a general association between growth and crimes.

5. Higher economic growth has led to more hours worked

In the beginning of the industrial revolution, higher growth led to people working lower hours.(3) However, in the past couple of decades higher incomes have actually led to people working longer hours. It seems people are unable to enjoy their higher incomes. Feeling the necessity or preferring to work longer hours. This suggest people are valuing earning money more than leisure. However, this trend may also be due to companies wanting people to work longer hours.

6. Diseases of affluence

Economic Growth has enabled improved health care treatments, but at the same time there has been an unexpected rise in the number of diseases and illnesses related to increased prosperity.(4) One example is obesity. Modern lifestyles and modern diets have created an epidemic of obesity, with significant proportions of the population expressing a desire to lose weight. It could be argued that problems such as obesity and stress related illnesses are not a direct consequence of growth. This is true, but, it is symbolic of the fact increased prosperity has created as many new problems as it has solved

References

1. Gary Burtless, Senior Fellow, Economic Studies Program  “Has Income inequality really increased in US?” The Brookings Institution, January 11, 2007
2. The United States Crime Index Rates Per 100,000 Inhabitants went from 1,887.2 in 1960 to 5,897.8 in 1991. By 1991 the crime rate was 313% the 1960 crime rate.
3. A new study by the Organization for Economic Cooperation and Development (OECD) confirms that on average, people in the U.S. are putting in 20 per cent more hours of work than they did in 1970. See: Spark
4. Obesity related illnesses rise with economic development Disease of Affluence

Conclusion

There are clearly some benefits of economic growth. These benefits are most visible when for low income countries. Economic growth enables the possibility to deal with many serious problems of poverty, homelessness and lack of basic amenities. However this paper is more interested in whether economic growth in developed economies is actually increasing living standards. Does rising incomes equal rising satisfaction? The answer is not clear-cut. However there are clearly several issues, which suggest that economic growth, has contributed to serious social, environmental and economic problems, which have reduced living standards. This is not to say economic growth is doomed to bring unhappiness. In fact the challenge is to harness the potential of economic growth to make sure it really does increase sustainable living standards.

Source

Growth

GDP was developed in the 1930s to help measure economic output. It is certainly one of the most useful economic statistics. But, it has often been criticised for showing only a limited snapshot of economic welfare and happiness.

Because GDP is international comparable, it has become something of a holy grail to measure economic performance. Yet, as is easily forgotten GDP has many limitations such as:

• It doesn’t measure environmental factors like pollution and air quality.
• It doesn’t evaluate  the quality of health care and life expectancy.
• It doesn’t measure education standards and literacy
• It ignores Crime Rates
• GDP per capita doesn’t measure the equality of distribution of income.
• How hard do people have to work? How much leisure time do people have?

The Republic of Bhutan has developed a happiness index which looks at 72 factors to determine overall economic welfare.

Recently, the French President, Nicholas Sarkozy supported a report by two Nobel economists, Joseph E. Stiglitz of Columbia University and Amartya Sen of Harvard University that G.D.P. was insufficient and that measures of sustainability and human well-being should be included in a measure of national economic well being. (link)

Certainly GDP is an important statistic. In particular, it is by far the best guide to economic cycles. But, in the longer term, it would be beneficial to develop an internationally recognised measure of economic happiness (Human Development Index HDI) would provide a good starting point. It would also be beneficial for these other indicators to take greater weighting in the public’s impression and policy making decision.
A failing of economics is that the classical structure tends to look at issues from the narrow prism of profit maximising, GDP maximising as if economic welfare was intricately linked to having more money and more output. Economic welfare is much more complex than that, and efforts need to be made to combine these factors.

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Key indicators

Traditionally, the key measures of economic performance in macro-economics include:

1. Economic growth – real GDP growth.
2. Inflation – e.g. target CPI inflation of 2%
3. Unemployment – target of full employment
4. Current account – satisfactory current account, e.g. low deficit.

Of these indicators, economic growth is usually the most importance and given the greatest credence for economic performance. It is frequently used for international comparisons and is probably the most prominent statistic. Politicians can use GDP statistics as a trump card – as if a quarterly growth of 1.0% vindicates all economic policy.

However, real GDP has several limitations. Not least is the fact that it is not always a reliable guide to living standards. With stagnant wages, cost push inflation and a rising population, average median incomes have fallen in the recent decade. Between  2009-10 to 2011-12 median incomes fell  in the UK cumulatively by 5.9% from, taking average incomes back to levels seen a decade earlier. It means that despite the recovery in real GDP, some people feel that they are not benefiting from economic recovery.

Indicators for economic performance

The Fabian think tank believes that median income would give a better indicator to overall economic performance. They also state other indicators which would help give better impression of economy.

• Rate of National debt reductions
• Level of greenhouse emissions
• Income inequality
• Labour productivity
• Intermediate skills
• Affordable homes
• Incidence of low pay
• Employment rates

Pros and cons of GDP

For all its limitations, GDP is widely used across the world. It does gives a rough guide to the level of economic activity. The fall in GDP of 2008/09 was indicative of the recession. Prolonged growth of real GDP 1993-2007 was indicative of the relative prosperity and rise in living standards.

For all its faults GDP does give a useful guide to the economic cycle and is a indicator for monetary policy and fiscal policy.

GDP is also measurable – it is objective. For example, we could go to the other extreme and start a survey asking people whether they are happy with their economic situation? This may give an interesting insight into economic welfare. But, a raw statistics, such as GDP gives more confidence than a survey – which by its very nature is subjective.

The downside of GDP come when it is relied on too much. Rising GDP, could hide a fall in average incomes and a rise in poverty. GDP  doesn’t take into account income distribution. Growth in GDP could primarily benefit the top income strata.

For example, a problem the Fabian group identify is the rise in UK housing costs. In the past few decades, UK Housing has become less affordable. This is good new for home owners who see a rise in wealth and rents. It is bad news for people struggling to buy or pay rents. This is a classic example of how a rise in GDP can cause rising living standards for some, but falling living standards for others.

Don’t forget population. At the very least, we need to take into account population and real GDP per capita. The UK’s rising population is one reason for increasing GDP.

All statistics are limited

One problem is that all statistics have some limitation. Even employment rates can be partially misleading. For example is the employment temporary or permanent? Employment figures have been better than expected, but there has been a rapid rise in zero hour contracts causing an increase in labour market insecurity.

When I see national debt used as a measure of living standards I always start to worry. Countries which made enthusiastic attempts to cut their budget deficit, such as Greece and Portugal have seen a dramatic fall in living standards. It seems mistaken to use debt reduction as a measure of living standards when debt itself might be the necessary consequence of dealing with a demand side shock.

Overall

Overall, it is important for economists to look beyond the headline statistics. Real GDP will always be useful for showing the stage in the economic cycle. It is of some use in indicating living standards. But, it is far from the ultimate guide. There is always a need to look at similar statistics to give a better overall picture. In this case median income is definitely an important indicator to economic welfare. Similarly when looking at unemployment. It is insufficient to use just the raw unemployment data. We need to know the kinds and types of jobs created.