Academic journal article The Lahore Journal of Economics

Human Development and Economic Uncertainties: Exploring Another Dimension of Development

Academic journal article The Lahore Journal of Economics

Human Development and Economic Uncertainties: Exploring Another Dimension of Development

Article excerpt

Abstract

This study makes the case that economic uncertainties-i.e., the extent to which economies face systemic uncertainties-need to be considered another dimension of human development because they render development vulnerable, diminish social welfare, and constrain human capabilities. We propose a methodology for adjusting the human development index (HDI) for economic uncertainties, using the time variability of income changes as a proxy. We construct an adjusted index associated with the income component for the 2011 HDI. Our analysis indicates that such an index contains additional information. The percentage loss in the income component of the HDI seems to reflect the variability in economic indicators arising from the political and economic tribulations experienced by each country. In Pakistan's case, the results of a time-series analysis of the percentage loss from the uncertainty adjustment appear to closely trace the country's political and economic upheavals.

Keywords: Human development index, capabilities, human development, economic growth, economic vulnerability, uncertainty, risk.

JEL classification: D63, I32, I38.

(ProQuest: ... denotes formula omitted.)

1. Introduction

The United Nations Development Programme (UNDP)'s human development index (HDI) has been instrumental in focusing on the nexus between human development and economic growth. The index's simplicity in characterizing development as a composite of achievements in health, education, and income has made it a particularly useful tool for advocacy purposes and in de-emphasizing a growth-centric view of development.

The HDI has undergone many revisions since its inception in 1990. UNDP (2010) revised its indicators and functional form, but retained the index's three-dimensional structure. To address a major criticism that the HDI neglected within-country inequality, three additional indices were introduced: the inequality-adjusted HDI, the gender inequality index, and the multidimensional poverty index. According to Klugman, Rodríguez, and Choi (2011): "The 2010 HDR made a significant move away from the idea that the ideal measure of human development must cover only the three core dimensions." It is in this spirit that we explore a new dimension of human development in this paper.

One dimension that has not received much attention is the extent to which populations face economic uncertainties, rendering development vulnerable. These uncertainties arise from a wide range of risk factors, e.g., natural disasters, systemic political and market failures, external economic shocks, and adverse technological and market changes. The overall impact of economic uncertainties is to diminish human capabilities in the sense originally conceived of by Amartya Sen-"development as capability expansion" (Sen, 1985, 1990). The 2010 Human Development Report (HDR) raises the issue of economic vulnerabilities, noting that, "countries and people are vulnerable when their human development is threatened by various risks," but promises to address it in the following HDR (UNDP, 2010). The 2011 HDR, however, takes it up as an issue of development sustainability in the broader environmental, economic, and social context (UNDP, 2011).

We argue that economic uncertainties need to be explicitly considered as another dimension (negative) of human capabilities, and propose an uncertainty-adjusted HDI (U-HDI). Our methodology for constructing such an index takes the time variability of income changes as a proxy for economic vulnerability. This study presents the results of an exploratory exercise in constructing such an index across countries. We also present a detailed analysis for Pakistan in the context of the uncertainties associated with the country's political and economic environment over time.

2. Background

Since its introduction in 1990, the HDI has become a "yardstick of wellbeing" in discussions on development issues. …

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