The HDI and the Chimeric Quest for a Holistic Economic Index

Abstract

By providing crucial information about the economy’s state, economic indices empower policymakers to make informed adjustments to guide the economy in a more favorable direction. Given their considerable influence on policy, it is essential that economic indices measure what matters most. Historically, the most prominent economic index was gross domestic product (GDP), but concerns about its limitations prompted many economists and international organizations to call for the creation of a new economic index that would offer a more comprehensive assessment of a country’s development. The result was the Human Development Index (HDI), which measures development as an aggregate of performance in three domains—standard of living, health, and education. This paper evaluates the extent to which the HDI, as an economic index, succeeds in presenting a holistic assessment of a country’s development. It concludes that, while the HDI does indeed provide a more comprehensive assessment of economic development than GDP, it also has considerable shortcomings. Chief among these are its failure to reflect disparities in the distribution of achievement within the domains measured, as well as the exclusion of important domains, such as sustainability and human rights. It further argues that the quest for a holistic economic index is itself chimeric, as economic indices face an inherent tradeoff between specificity and breadth. Therefore, policymakers and analysts should place less weight on individual metrics and instead rely on a “development dashboard,” which incorporates multiple indices in conjunction with one another.