Written by Ryan McGuine //
The term “development” broadly refers to the level of well-being that people enjoy, but quantifying well-being is not an easy thing to do. The traditional way to measure and compare levels of well-being across countries is personal income, measured as gross national income (GNI) per capita, but many attempts have been made to develop more useful metrics.
A country’s GNI is the value of all foreign and domestic goods and services claimed by its residents in a year. This remains the most commonly-used measure of well-being, although there are plenty of criticisms of its use. These include that converting into a common currency bakes in errors, that counting only what gets bought and sold excludes many important activities, that it misses improvements in quality of goods, and that externalities are left out by definition. In sum, critics claim that GNI does a mediocre job assessing total economic product, and a poor one assessing quality of life. However, it remains in use because it is supremely easy to measure, and because solving problems is simply easier with more resources — there is more to well-being than wealth, but wealth enables societies to improve healthcare and education systems, and to cultivate virtues like integrity, courage, and wisdom.
One way to think of development is the antithesis of poverty. The World Bank defines extreme poverty as an income of $1.90/day or less, and has recently introduced poverty lines of $3.20/day for lower middle-income countries (those with a GNI per capita between $1,006 and $3,955) and $5.50/day for upper middle-income countries (those with a GNI per capita between $3,956 and $12,235). These indicators, referred to as “headcount” indicators of poverty, simply count the number of people with incomes below the cutoffs. They are relatively easy to measure, but the downside of simple measurement is simple misinterpretation. For example, if someone’s income is a few cents above the poverty line, they are not counted, while they are effectively just as well-off as someone making a few cents below the poverty line.
Another indicator often used to measure poverty is the poverty gap index, which takes the mean shortfall from the poverty line, and divides it by the value of the poverty line. Whereas a simple headcount indicator considers all people below the poverty line as equally poor, the poverty gap index provides information about how far the population is from the poverty line on average. This is valuable information, since a country whose population makes $1.89/day on average is clearly not equivalent to a country whose population makes $0.50/day on average.
While indicators based on personal income are indeed useful, many other factors also affect one’s quality of life. For example, health and education outcomes matter significantly for quality of life, both because they are directly important to one’s enjoyment of life, and because they indirectly affect one’s ability to produce and consume other goods and services. Countries with high personal incomes tend to have high levels of health and education, but this is not always the case. There are many examples of countries with high incomes and low levels of health and education, and vice versa.
In order to more accurately account for the significance of individual labor inputs and social outcomes, a group of people working within the World Bank in the 1970s including Paul Streeten, Frances Stewart, and Mahbub ul Haq spearheaded the “basic needs approach.” This posits that the poor need a certain basic goods and services, and that a decent life depends on how these are consumed. These thinkers kicked off a paradigm that would come to be known as “human development.”
In the 1980s, Amartya Sen furthered the human development framework by establishing his “capabilities approach,” which argues against considering income as an end in itself, and that development should instead be concerned with expanding the freedoms that we have reason to value — namely political freedoms, economic facilities, social opportunities, transparency guarantees, and protective security (explanations of each can be found in this report). Sen defines one’s “capability set” as the alternative combinations of functions that are feasible for them to achieve, and suggests using capabilities as the evaluative measure for well-being.
The United Nations Development Programme (UNDP) formally defined human development in its inaugural Human Development Report (HDR) in 1990 as “a process of enlarging people’s choices” to improve the human condition. The HDRs established the Human Development Index (HDI), a measure designed to provide a richer mechanism of evaluating well-being than personal income alone. The HDI is a composite of indicators for longevity (measured by life expectancy at birth), knowledge (measured by expected years of schooling and mean years of schooling), and a decent standard of living (measured by GNI per capita).
While the HDI likely does a better job of measuring overall well-being than personal income alone, there remains much debate over its accuracy. On the face of it, this may seem like a wonky, inconsequential thing to argue about. However, the HDI is one of the main determinants of aid and technical assistance from the UN and many non-governmental organizations (NGOs), and was used to both define and assess progress on the Millennium Development Goals (MDGs) and Sustainable Development Goals (SDGs).
One early debate about the HDI was whether one number was sufficient to reflect the full extent and complexity of human capabilities. Other concerns have included claims that the method for income adjustment is inaccurate, and that there is not sufficient information for some of the statistics used. More recently, the UNDP changed the way the individual indicators were combined to create the composite HDI. Interested readers can find a blog post criticizing the change from a vocal aid critic William Easterly, a response by the UNDP’s Francisco Rodriguez, and a response to Mr Rodriguez’s response by the World Bank’s Martin Ravallion.
In summary, there are many ways to measure well-being and compare it across countries (many more than were presented here), and there are legitimate criticisms of every one. While there are ongoing efforts to create the most robust measures possible, it is unlikely that any single value will ever be able to provide an absolutely comprehensive measure of well-being. As such, selecting a measure to use must be done on a case-by-case basis and requires an understanding of what information each can provide based on its underlying calculation.