Please cite as Schimmack, U. (2008). Nations' wellbeing and the Human Development Index (HDI). wellbeingscience.org.

Nations' Wellbeing and the Human Development Index (HDI)

May 28, 2008

Abstract

The Human Development Index (HDI) is a widely used measure of nations' wellbeing. It is often assumed that the HDI is a better measure of nations' wellbeing than Gross National Product (GDP). This hypothesis was tested using self-reported life-satisfaction and happiness as validation criteria. GPD was a superior predictor of both subjective measures than the HDI. The results do not support the hypothesis that the HDI is a better measure of nations' wellbeing than GDP.

Introduction

Ideally, one goal of national governments is to increase citizens' wellbeing. To achieve this goal, national governments need (a) theories about the effects of policies on wellbeing, and (b) measures of wellbeing to evaluate the effectiveness of policies in achieving this objective.

Historically, the most widely used measure of wellbeing has been economic activity or wealth. Although there are various measures of nations' wealth, the most widely used measure is Gross Domestic Product per capita (GDP). For comparisons of wellbeing across nations, GDP is often converted into US dollars on a basis of Purchasing Power Parity (PPP) to adjust for differences in purchasing power between countries (GDP per capita [PPP]). That is, a US dollar buys more goods in a poor country like China than in a rich country like Switzerland.¹

The use of GDP per capita as an indicator of nations' wellbeing has been criticized on various grounds. In the 1990s, the United Nations Development Programme (UNDP) developed the Human Development Index (HDI) as an alternative measure of nations' wellbeing (Davies & Quinlivan, 2006). The UNDP argues that the HDI is a better measure of wellbeing than GDP for several reasons. First, it is broader because it explicitly measures health and education. Second, it is based on Sen's influential theory of wellbeing in terms of all human capabilities, rather than simply humans' economic activities that are recorded in GDP.

In a relatively short time, the HDI has become a more popular measure of nations' wellbeing than GDP. However, the incremental validity of the HDI as a better measure of nations' wellbeing has never been tested. In other words, it has not been shown that the HDI is a better measure of nations' wellbeing than GDP.

Method and Results

Before I examine the incremental validity of the HDI, it is important to note that the measure shows convergent validity with other indicators of nations' wellbeing. The most direct evidence stems from a substantial correlation between the HDI and GDP per capita. Relevant data are available on the UNDP website (UNDP, May 27, 2008). I examined the HDI scores of 1975, 1980, 1985, 1990, 1995, and 1999 and PPP in 1999 and 2005. Each indicator shows high temporal stability with correlations above .95. The correlations between GDP per capita and HDI range from .77 to .83. The correlation between HDI and GDP per capita in 1999 was r = .77 (N = 162). Thus, broadly speaking both indicators show similar rank ordering of nations. However, the cross-construct correlations (HDI – GDP per capita) are lower than the same-construct correlations (HDI-HDI or GDP – GDP). Thus, HDI has the potential to demonstrate incremental validity over GDP per capita as a measure of nations' wellbeing.

A test of incremental validity requires at least one additional measure of nations' wellbeing. For this purpose, I used nations' average ratings of life-satisfaction and happiness in the World Value Survey, which are also available on the web (WVS).

The correlation between HDI in 1999 and average life-satisfaction was r = .60 (N = 69).
The correlation between GDP per capita (PPP) in 1999 and average life satisfaction was r = .77 (N = 69).

A regression analysis with average life-satisfaction ratings as dependent variable showed a significant contribution of GDP per capita (standardized coefficient .57), and a weaker (non-significant) contribution of HDI (standardized coefficient .14).

The correlation between HDI in 1999 and average happiness was r = .17 (N = 66).
The correlation between GDP per capita (PPP) in 1999 and average life satisfaction was r = .46 (N = 66).

A regression analysis with average happiness ratings as dependent variable showed a significant POSITIVE contribution of PPP and a significant NEGATIVE contribution of HDI.

Conclusion

The results fail to support the hypothesis that HDI is a superior measure of nations' wellbeing than GDP per capita, adjusted for purchasing power. Contrary to this prediction, GDP per capita was a better predictor of nations' average level of self-reported life-satisfaction and happiness than the HDI.

Limitations

The results are not conclusive for a number reasons.
1. Only two subjective validation criteria were used and other measures of nations' wellbeing could produce different results.
2. The correlation is influenced by the selection of nations and other results could be obtained in a different set of nations.
3. Subjective measures of wellbeing could be biased in favor of GDP per capita, which would inflate the correlation between these two measures.

References

Davies, A., & Quinlivan, G. (2006). A panel data analysis of the impact of trade on human development. The Journal of Socio-Economics, 35(5), 868-876.

Footnotes

¹ I thank John Helliwell for pointing out the differences between Purchasing Power Parity (PPP) and Gross Domestic Product converted into US dollars on the basis of Purchasing Power Parity. The latter was used for these analyses.

Peer Review

Not available

Please email me if you have relevant information or criticisms related to this discussion of the HDI and wellbeing?
This post has not been peer-reviewed. Please write an open peer-review of this post and send it to me. I will post it along with the article.

(uli.schimmack at utoronto.ca).