Friday, December 26, 2014

On the measurement of development progress

There is an article in the year's end (double edition) of The Economist on the measurement of development progress. The article suggests that the oft used measure of increase in Gross Domestic Product (GDP) is difficult to measure, and presents difficulties in international comparisons. More to the point, many feel that it does not capture the goals of social and economic development well. One important alternative is the UNDP's Human Development Index. While this seeks to combine economic production, education and health, I find it too suffers from failing to capture fully what development is all about. The article notes:
In recent years many have instead focused on happiness. The United Nations has been publishing an annual “World Happiness Report” since 2012. The British government measures “personal well-being” across the country on an annual basis. Yet happiness has its own shortcomings, argues Martha Nussbaum of the University of Chicago. 
Happiness notably suffers as an indicator in that "People are prone to what philosophers call 'adaptive preferences', meaning that they may fail to report their 'true' happiness." Moreover, the individual's view of "happiness" may focus on a hedonistic concept, and may not reflect the philosopher's more nuanced view.

The author of The Economist article cites a 1999 article by William Easterly which is sufficiently important that I quote its Abstract in it entirety:
A remarkable diversity of indicators shows quality of life across nations to be positively associated with per capita income. At the same time, the changes in quality of life as income grows are surprisingly uneven. Either in levels or changes, moreover, the effect of exogenous shifts over time is surprisingly strong compared to growth effects. This paper reaches this conclusion with a panel dataset of 81 indicators covering up to 4 time periods (1960, 1970, 1980, and 1990). The indicators cover 7 subjects: (1) individual rights and democracy, (2) political instability and war, (3) education, (4) health, (5) transport and communications, (6) inequality across class and gender, and (7) “bads.” With a SUR estimator in levels, income per capita has an impact on the quality of life that is significant, positive, and more important than exogenous shifts for 32 out of 81 indicators. With a fixed effects estimator, growth has an impact on the quality of life that is significant, positive, and more important than exogenous shifts for 10 out of 81 indicators. With a first-differences IV estimator, growth has a causal impact on the quality of life that is significant, positive, and more important than exogenous shifts for 6 out of 69 quality of life indicators. The conclusion speculates about such explanations for the pattern of results as: (1) the long and variable lags that may come between growth and changes in the quality of life, and (2) the possibility that global socioeconomic progress is more important than home country growth for many quality of life indicators.
Economist Easterly is an important economic theorist, and I find his use of a wide variety of indicators (grouped into seven sets) to be interesting. I find the suggestion that development progress is not uniform and is affected by external factors to be intuitively appealing,

The Economist article also cites the ideas of Amartya Sen who
argues that “capabilities” are the way to go. The definition of a capability is a bit fuzzy: at its simplest, a capability is something that people have reason to value. The list of potential capabilities is endless: the opportunity to live a long and healthy life, the freedom to take part in political life or to be well nourished. Capabilities, says Mr Sen, are ends that economists should strive to maximise: income is just one of the many means by which we get there.
I think that the development community is irrevocably committed to using a variety of indicators to measure different aspects of social and economic development. I rather like the idea that individuals ought in a liberal society to have the right to choose how best to balance among the different objectives. Who am I to tell the philanthropist who chooses to give away wealth to do good, or the business man who chooses to acquire wealth in the process of producing goods and services, or the government official who chooses a bureaucratic career assuring a level playing field under rule of law that their choices are better or worse than those of others.

At the public level, I rather like the idea of a number of constraints -- that the society should be operating in such a way that a level of health and/or health services should be assured, that a level of intellectual development and/or educational services should be assured, that a level of income should be assured, etc. There could be a debate on the trade-offs -- how much health service would the society be willing to trade off for how much social safety net, or how much schooling? Constraints in this sense would be minimum values, and presumably people would be pleased if some benchmarks were exceeded as long as it were not at the expense of others constraints that were not met.

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