Ninth Annual Conference on Management of the Pakistan Economy Human Capital Development for Sustained Economic Growth/ Human Development and Economic Vulnerability – Exploring Another Dimension of Development.

Abstract

The UNDP’S Human Development Index (HDI) has been employed widely for focusing on the nexus between the 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. HDI’s has also invited much criticism of two broad categories: (i) choice of development dimensions, and (ii) its functional form. In response the HDI has undergone many revisions since its inception in 1990. In the latest revision, UNDP (2010), the HDI has undergone major changes to the included indicators and its functional form. Klugman et al. (2011) and Lustig (2011) explain in detail the rationale behind the new HDI, while Ravallion (2010) offers a critical view. The 2010-HDI, however, basically keeps the same three-dimensional structure. To address a major criticism that the HDI neglected within country inequality, three additional indices are introduced: the Inequality-Adjusted HDI, the Gender Inequality Index, and the Multidimensional Poverty Index. A development dimension which has not received much attention is the extent to which populace faces income and wealth uncertainties. These uncertainties arise from a wide range of risk factors e.g., natural disasters, systemic political and market failures, external economic shocks, adverse technological and market changes. The overall impact of economic uncertainties is to diminish human capabilities in the sense Amartya Sen originally conceived of “Development as Capability Expansion,” Sen (1985, 1990). We argue in the current paper that the economic uncertainties need to be explicitly considered as another dimension (negative) of the human capabilities, and propose an Uncertainty-Adjusted HDI (U-HDI). We present a methodology for constructing such an index, taking time variability of income changes as a proxy for economic vulnerability. We follow an approach similar to the one used to compute Inequality-Adjusted HDI based on Atkinson (1970). The paper presents results of an exploratory exercise in constructing such an index across countries. We also present an analysis for Pakistan in the context of the uncertainties associated with the country’s political and economic environment over time.