Alternative Measures of Economic Welfare

Traditional economic measures like Gross Domestic Product (GDP) focus primarily on monetary production and market transactions. However, these indicators have limitations, as they fail to capture important aspects of well-being such as health, education, environmental sustainability, and social equity. As a result, alternative indices have been developed to provide a more holistic view of economic welfare.

1. Human Development Index (HDI)

Introduction:

The Human Development Index (HDI) was introduced by the United Nations Development Programme (UNDP) in 1990, primarily developed by Amartya Sen and Mahbub ul Haq. It aims to measure human development in a more comprehensive way than traditional economic measures like GDP.

Components of HDI:

1. Health (Life Expectancy at Birth):
   
   • Reflects the average number of years a person is expected to live from birth.
     
   • It gives an idea of the overall health and longevity of a population, which is a crucial determinant of human welfare.
     
2. Education:
   
   • Mean Years of Schooling: The average number of years of education received by people aged 25 years and older.
     
   • Expected Years of Schooling: The number of years of schooling a child of school-entry age is expected to receive.
     
   • Education is a critical component of human development, as it directly affects individual opportunities and the potential for economic advancement.
     
3. Standard of Living (Gross National Income per Capita):
   
   • Represents the average income of a country’s citizens, adjusted for purchasing power parity (PPP), which helps compare income levels across countries by eliminating cost-of-living differences.
     
   • A higher standard of living is crucial for accessing healthcare, education, and other amenities that contribute to well-being.

HDI Calculation:

• The HDI is calculated as the geometric mean of the normalized values of the three dimensions.
  
• It ranges from 0 to 1, where a higher score indicates a higher level of human development.
  

Significance:

• Focus on Human Capabilities: HDI shifts the focus from purely economic performance to the broader concept of human well-being.
  
• It enables cross-country comparisons based on health, education, and income, giving a more nuanced view of development than GDP alone.
  

2. Gross National Happiness (GNH)

Introduction:

Gross National Happiness (GNH) was introduced by the King of Bhutan, Jigme Singye Wangchuck, in the 1970s. The concept challenges the conventional view that economic growth (measured by GDP) should be the central goal of development. Instead, GNH places a greater emphasis on happiness and well-being as key objectives of policy.

4 Pillars of GNH:

1. Sustainable and Equitable Socio-Economic Development:
   Focus on achieving development in a balanced, fair, and sustainable way, ensuring that economic benefits are widely distributed.
   
2. Conservation of the Environment:
   A commitment to maintaining the natural environment, reflecting the belief that development should not harm the planet’s resources and ecosystems.
   
3. Preservation and Promotion of Culture:
   Maintaining cultural traditions and practices, and ensuring that modernity does not erode a society’s identity and values.
   
4. Good Governance:
   A key pillar emphasizing the importance of governance in promoting welfare, justice, and accountability in the country’s administration.
   

9 Domains of GNH:

• Psychological Well-being
• Health
• Education
• Time Use
• Cultural Diversity and Resilience
• Good Governance
• Community Vitality
• Ecological Diversity and Resilience
• Living Standards
  

Significance:

• GNH presents an alternative measure of development that emphasizes happiness and quality of life rather than economic growth alone.
  
• It is a holistic approach that recognizes the importance of mental well-being, community, culture, and environmental sustainability.
  
• Bhutan has used GNH to guide policy decisions and ensure that development doesn’t come at the expense of social and environmental welfare.

3. Genuine Progress Indicator (GPI)

Introduction:

The Genuine Progress Indicator (GPI) was developed to measure sustainable economic welfare, correcting the deficiencies of GDP by considering both positive and negative factors associated with economic activity.

Components of GPI:

• Personal Consumption Expenditure (PCE): Measures total consumption, but adjusted to include only the net benefits derived from consumption (excluding harmful goods like tobacco and alcohol).
  
• Value of Non-Market Services: Adds the economic value of unpaid work like volunteer work, household production, and caregiving—which are typically excluded from GDP.
  
• Negative Adjustments:
  
  • Environmental Degradation: Subtracts the costs of pollution, resource depletion, and other forms of environmental harm.
    
  • Social Costs: Subtracts costs associated with crime, inequality, and unemployment.
    

Significance:

• GPI adjusts GDP to account for unsustainable growth and inequality.
  
• It offers a clearer picture of net welfare by adding the value of unpaid labor and subtracting costs related to environmental damage and social ills.
  
• Provides a measure of progress that focuses on sustainability and long-term well-being, rather than short-term economic output.

4. Multidimensional Poverty Index (MPI)

Introduction:

The Multidimensional Poverty Index (MPI) was introduced by the UNDP and the Oxford Poverty and Human Development Initiative (OPHI) in 2010. Unlike traditional poverty measures that rely solely on income thresholds, the MPI considers multiple deprivations people face in their lives.

Dimensions of MPI:

1. Health:
   
   • Nutrition: Whether a person is deprived of adequate nutrition.
     
   • Child Mortality: Deprivation from the loss of young children.
2. Education:
   
   • Years of Schooling: Deprivation due to insufficient education levels.
     
   • School Attendance: Deprivation caused by children not attending school.
3. Living Standards:
   
   • Cooking Fuel: Deprivation from access to clean cooking fuel.
     
   • Sanitation: Deprivation caused by lack of access to proper sanitation facilities.
     
   • Drinking Water: Deprivation from inadequate access to clean drinking water.
     
   • Electricity: Deprivation due to lack of electricity.
     
   • Flooring: Deprivation related to poor housing (dirt or mud floors).
     
   • Assets: Deprivation in terms of ownership of basic assets (such as television, phone, bicycle).
     

Significance:

• The MPI is a multidimensional measure, acknowledging that poverty is not just about income but involves several overlapping factors like education, health, and living conditions.
  
• It enables a deeper understanding of poverty by showing how individuals are deprived across multiple dimensions simultaneously.
• The MPI offers a more comprehensive view of poverty than traditional income-based measures.