Chapter 4: Frontiers of Poverty Measurement
income and other welfare indicators are often positively correlated, for both individual and country-level data, which may suggest that the nonincome indicators are not needed. But as emphasized by Sen (1999), notable exceptions to these regularities exist. A proper measure of progress should convey empirical realities in all eventualities, including exceptional cases. Correlation does not justify dropping important dimensions in assessing progress. The Human Development Index (HDI) of the United Nations Development Programme was designed as an alternative to income per capita that includes health and education achievements in a country (thus addressing the second critique). The underlying structure of the traditional HDI is straightforward, even if the details of its construction are not. A country’s achievements in income, health, and education are summarized in three indicators that are normalized to lie between zero and one. The traditional HDI is a simple mean of these components. The precise construction of the indicators—including the choice of “goalposts” for normalizing a variable and its specific transformation—can affect the HDI’s picture of development across countries. As an example, the income indicator used in the HDI is based on a logarithm of income per capita; if the untransformed variable were used instead, the ranking at the upper end would more closely follow the income ranking of these countries. This lack of robustness is indicative of the challenge of constructing component indicators that can be meaningfully combined into a composite indicator. One alternative to combining dimensions into an overall indicator is to provide a dashboard of dimensional indicators. If indicators were not being combined, normalizing goalposts and special transformations would not be needed; the variables could be presented in their original, more comprehensible forms. In particular, one could dispense with the log transformation, because average income itself would rank countries the same way—within this dimension. However, many good reasons exist for using a composite indicator rather than a vector of components. A single numerical indicator is more salient and easier to track. A comprehensive measure emphasizes the point that we are more interested in overall progress than progress in any given dimension. Moreover, given that the aggregation formula is decomposable, it invites further analysis to identify which components are driving the overall results. The success of the HDI would have been unlikely if only a dashboard of dimensional indicators had been provided.
235