Download Discuss the strength and limitations of income per capita as a

Name: Caroline Epe
Degree programme: MSc Development Studies
Course: Political Economy of Development
Essay No: 1
Seminar Tutor: Ben Whiston
Seminar Group Number: 11
Essay Title:
Income Per Capita is One of Many Important Measures of
Human Development
Submission Date: 14/11/08
Word Count:
Income Per Capita is One of Many Important Measures of
Human Development
Introduction
“Wealth is evidently not the good we are seeking; for it is merely useful and for the
sake of something else” (Sen, quoting Aristotle, 1999). What Aristotle said is also repeated
in different terms by the 1996 Human Development Report: “human development is the end
– economic growth the means” (Ravallion, 1997) Income per capita measures the wealth that
is ultimately only the means to something else for almost all humans. This fact alone does
not diminish its importance when looking at the world and especially developing nations.
When considering human welfare, money or income itself is not desirable but it is the
products and services that income can buy and the social standing it might create. Higher
income will almost certainly lead to higher quality of life since people will have better
access to goods like food, shelter, and clothing when their income rises.
In the field of development studies an indicator of how countries and regions are
progressing is needed, and in the past and present income per capita has been useful at
measuring human welfare all over the world. Income per capita cannot consistently predict
human development or even indicate how people are living since there are many other
variables that play a role when looking at human welfare. Income per capita has shown to
have high correlation with human development factors such as access to health care and
education and as a consequence higher life expectancy and literacy (Ravallion, 1997,
McGillivray, 1991 and Summers & Pritchett, 1996).
This paper will discuss how income per capita (PPP values) can be useful in
measuring human welfare when used in addition to other measures. The next two sections
will show the strengths and limitations of income per capital. I will discuss how income per
capita loses most of its usefulness if inequalities are ignored and how there are nations that
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can have very high human welfare without the usually correlating income by using data from
the UNDP’s Human Development Reports. I will argue that income per capita is needed but
should never be the sole indicator of human welfare or development. The third section will
discuss the Human Development Index as an alternative and how it has approached some of
the limitations of income per capita but also how it creates new issues in terms of data and
how it is far from all encompassing, by excluding political other freedoms. In conclusion, I
will argue that HDI and income per capita should never be the only measures used and the
measurement should not be the primary interest but that it is important to take into account
how the measures influence policies.
Strengths of Income Per Capita
Compared to other measures in the development field, income per capita is a fairly
straightforward measure to calculate and to use. GDP and GNP data is compiled by various
sources and is therefore relatively reliable in terms of calculation and accuracy despite some
problems. Income per capita for countries or regions can be portrayed as a single number
and is therefore simple to use. It is can also be indicative of rises in health and education,
which helps when trying to rank countries and compare them to each other. GDP data is
especially easy to obtain compared to the Human Development Index (HDI), which was
introduced by the United Nations Development Programme (UNDP) in 1990. The data on
GDP does have limitations on what it tells you about human welfare but there are far less
problems in obtaining data than with the HDI. The HDI requires data on literacy and life
expectancy, which are much harder to acquire. Data on such human development factors
usually require some input through household surveys, which are not always available. This
leaves data open to errors through misrepresentation or lack of sufficient data. In
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comparison, income per capita data is either compiled through National accounts or
consumption and therefore leaves less room for error and influence from other sources.
Despite not being a direct measurement of human welfare, income per capita has
been shown to have high correlation with human welfare factors such as health, education
and various others. A study by Pritchett and Summers (1996) showed that there is a strong
correlation between wealth and health. The study showed that a rise in income per capita has
led to a rise in health for various reasons for instance higher productivity of health workers
due to higher wages. Pritchett and Summers go even further with their results and claim that
higher income causes better health (Pritchett and Summer, 1996, p.844). Their results would
indicate that income per capita is not only a good measurement of human welfare but should
also be one policy focus when trying to improve health conditions in developing countries in
addition to changing health conditions directly through for example more and higher quality
hospitals or sending health workers to the developing nations for training of local personnel.
Although there is truth in the argument that not all growth is necessarily good for the
poor and their welfare, rarely is economic growth leading to worsening of human welfare
(Ravallion, 1997). Ravallion states that a 5% rise in average household income leads to a
10% drop in the proportion of people living under the poverty line. This shows that a rise in
income per capita usually increases human welfare often through better access to healthcare
and education (Ravallion, 1997, p.635).
Limitations
Measuring growth not development
One of the main critiques of using income per capita is that is does not actually
measure development. Although a rise in income per capita can indicate that development is
taking place, in reality the only thing it can reliably show is economic growth not
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development. Even if we accept that a significant rise in income per capita is partly due to
economic development that does not always translate into higher human welfare such as
better healthcare and more opportunities for the poor. Economic development usually
includes factors such as rise in productivity, diversification of production, introduction of
new technologies and sometimes a rise in exports as products become more competitive;
income per capita cannot show these things specifically. If economic growth is not seen
because of economic development but because of reasons like exploitation of natural
resources, the rise in income is not likely to benefit the population as a whole and will often
not be sustainable in the long term. Many of the oil rich nations have seen considerable
growth in GDP per capita but this has not translated into the lower income population to
benefit from it because large corporations or governments often control natural resources
such as oil. Only in countries where the government uses the income from natural resources
to increase public spending and provide better social services such as education and
healthcare can economic growth lead to increases in human welfare.
One example of the problem of using income per capita in oil-rich nations is
Equatorial Guinea where GDP has risen sharply since the discovery of oil in 1996 (???
WORLD BANK NUMBERS). The 2007/2008 Human Development Report shows that
Equatorial Guinea is ranked 54 places lower in terms of HDI than in GDP per capita (HDR,
2007/08, p.231). This difference is very high compared to other countries and indicates that
despite a rise in income per capita it has benefited the living standard of the general
population very little. Income per capita cannot capture this problem since it shows an
increase even if the majority of inhabitants of the country see little of that increase in their
own income.
If income per capita can overestimate human welfare in oil-rich nations, it can also
do the opposite in other countries, which might have invested more in the human welfare of
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its citizens. According to the HDR (2007/08, p.231) a country like Myanmar for example
ranks 35 places higher when using HDI than GDP per capita. This means that despite very
low income, the human welfare seems to be higher compared to countries with similar
income per capita. A higher place in HDI ranking than GDP per capita can have various
reasons depending on the country. In some cases, the state has invested more in education.
Myanmar spent 18.1% of GDP on education in 2002-05 (HDR 2007/08, p.267).
Ignoring Inequality
The second major limitation of measuring human welfare in income per capita is its lack
of information about inequality. There is much discussion about inequality and its effect on
growth and development in different regions but in relation to using income per capita as a
measurement for human welfare it is more important to see how income per capita in
countries with high inequality can skew the perception of human welfare. In statistical terms
a few very rich people with high incomes can increase the average income per capita and
therefore leave the impression that human welfare is improving, when in a reality the change
in income per capita is not reaching the poor and is therefore having very little effect on
human welfare (Streeten, 1994, p.235).
In countries with high inequality income per capita can be a flawed indicator of human
development since the income of the majority of household is most likely significantly
below the average due to a few very rich individuals. Botswana is an example where the
numbers in the Human Development Report show the danger of using income per capita to
assess the situation. The 2007/08 HDR states that Botswana’s place in the world ranking in
terms of GDP per capita is 70 places higher than its ranking in the HDI index. This indicates
that the country is not using its money in a way that benefits the majority of people in their
human development. The HDR’s numbers on inequality show that Botswana has relatively
high inequality, which shows in the difference between HDI and income per capita. In the
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case of Botswana the very high rate of HIV prevalence and the low life expectancy as a
consequence probably also play a role in explaining why the HDI is a better indicator in the
case of Botswana.
These strengths and limitations of income per capita as a measure show that it is
certainly one good indicator because it often correlates with other human development
factors but as the only measure it can lead to wrong conclusions about the state of human
welfare. If looking for initial indication of the economic situation in a county, it can be a
good number to look at and should be used for answering some questions in order to better
understand how countries are changing their economies. It is useful as long as those who use
it for making judgments and policies are aware of its limitations and take other measures into
account to counter those problems. It is still a useful measure in many respects and should be
considered as one of many factors when looking at development in various countries despite
its limitations.
The HDI as an Alternative
The United Nations Development Program (UNDP) developed the Human
Development Index (HDI) as an alternative to using income per capita, since income could
only show economic growth and not the human development that accompanies it or the level
of human welfare present in a country and as the report states “income is not the sum total of
human life” (HDR, 1990) The 1990 Human Development Report introduced the index as a
alternative to using income and to re-focus development on human welfare because the
1980s had shown problems such as a lack of social or human development despite GDP
growth in some countries and even developed nations were not immune to problems with
human welfare (HDR, 1990, p.9-10). The report seems to claim that experts have solely
focused on income in the past decades but Srinivasan has said income per capita was never
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the primary or sole measure for economists or policymakers (Srinivasan, 1994, p.238).
The HDI, in addition to taking income into account (PPP values), also uses life
expectancy and literacy to determine a country’s HDI. This is certainly useful for policies
and for accurately portraying a country’s situation in terms of human welfare. There are
cases where the HDI shows conditions very different from income per capita alone, but it is
also important to state that for many other cases, countries have shown similar situation
when using the HDI or when using income per capita. It is important to look at countries that
show great discrepancies between HDI and income ranking to determine if there are
fundamental difference in the policies of those countries.
After its introduction in 1990 the Human Development Index received widespread
attention and critiques from various academics. Hopkins (1991) argues that the HDI is useful
but also has its limits and does not show a country’s success in economic growth. Hopkins
addresses the widely used example of Sri Lanka. Many experts have used Sri Lanka as an
example where human welfare is relatively high considering its low GDP per capita.
Hopkins argues that the history of Sri Lanka is not as straightforward as it is sometimes
portrayed since the government actually had two very different policy agendas that initially
included high social expenditure followed by concentrating on economic growth between
1960-84 (Hopkins, 1991, p. 1471-1472). He also quotes an article by Bhalla and Glewwe
who have said that much of Sri Lanka’s success in human development indicators is due to
its colonial legacy rather than its policies since independence.
Those in favor of using the HDI as an alternative to income per capita should not
forget that a study by McGillivray (1991) showed significant correlation between HDI and
each of its variables as well as between the variables when including all countries. This
indicates that although being useful for combining data on income, literacy and life
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expectancy the HDI does not necessarily show us anything entirely new or different than the
individual components have shown already.
Conclusion
Measuring human development is a complicated and important issue especially since
the kind of measurement and the conclusions drawn from it often have important policy
implications, which can directly affect the lives of people in the developing nations. Today
the field of development studies uses a variety of measures, some more popular than others.
Two of the most important and widely used are income per capita and the Human
Development Index developed by the UNDP, other being the Gini coefficient for inequality
and some gender indices. Since its creation and publication in 1990 the HDI has received
widespread attention from aid agencies, governments and NGOs. Many development
workers look favourably to the HDI since it measures those indicators that they aim to
change rather than income, which is only the means of human development.
When arguing for using the HDI rather than just income per capita, it is important not
to ignore the problems that the HDI has. While it is certain that the data used for income is
often not completely reliable either, there are fewer problems than with the data for the other
HDI components. It is difficult to collect dependable data on each of the HDI’s components,
for example adult literacy as well as life expectancy data is often obtained by using
neighbouring countries or regions as proxies when real data is unavailable. As Srinivasan
(1994) points out, it starts with problems with very basic data on population when a
comprehensive populations census has not been done in recent years. According to Chamie
as many as 87 out of 117 countries have no reliable data on life expectancy (Srinivasan,
1994, p.16). Often the data is presented as if it was recently collected when in many
circumstances approximations or very old data is used (Srinivasan, 1994, p.17). This could
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mean the HDI is not always a real representation of the situation on the ground and if policy
directions are chosen and policy decisions are based on the HDI it is important to make the
correct decisions based on the correct data. Otherwise aid agencies could direct their
resources towards the wrong priorities.
Despite the HDI’s strengths, income per capita should not just be used as a secondary
measure or within the HDI. Income in itself might only be the means to an end but in my
opinion a country, which is managing to increase human welfare without economic growth,
is very likely to do so with money coming into the country through various grants and loans
from the foreign aid industry rather than income from its economy. A country that wants to
create sustainable increases in human welfare ultimately needs economic growth to finance
its increased spending in education and healthcare. Also, I believe that human development
as measured by such things as life expectancy and literacy is only truly improving the human
conditions if their choices and capabilities increase. Often one of the main factors in
increases in capabilities is income. With rising income, people have more choices in terms of
the products and services they have access to. Inevitably, income and increases in other
human welfare measures interact with each other. Higher income will not only lead to better
health and education but people who have are healthier and enjoy better education will also
have higher earning potential, leading to an almost circular relationship between income and
other measures.
Amartya Sen’s Development as Freedom (1999) in the beginning highlights the
problem that both income and the HDI only include very limited components of
development. Sen’s capabilities approach stresses the importance of other factors and names
to many to list. Important is that he includes in his analysis of what development should
mean that the capabilities people want is a value judgement, i.e. there are no set capabilities
that should be addressed but people’s preferences often guide the capabilities they would
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like to obtain. Since certainly makes development more complex and it makes a universal
approach almost impossible as cultures vary immensely. Sen offers no set list of important
capabilities because they vary so much. I agree with Alkire, who in her article on dimensions
of human development concludes that any attempt at specifying which capabilities are most
valuable should be “collaborative, visible, defensible and revisable” (Alkire, 2002, p.194).
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Bibliography
Alkire, S., 2002, Dimensions of Human Development, World Development, 20(2),
pp. 181-205
Hopkins, M., 1991, Human Development Revisited: A New UNDP Report, World
Development 19 (10), pp.1469-1473.
McGillivray, M., 1991. The human development index: Yet another redundant composite
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Pritchett, L. & Summers, L.H., 1996. Wealthier is Healthier. The Journal of Human
Resources, 31(4), 841-868.
Ravallion, M., 1997. Good and bad growth: The human development reports. World
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Sen, Amartya, 1999, Development as Freedom, Oxford University Press, Oxford
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analysis: An overview. Journal of Development Economics, 44(1), 3-27.
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Wheel? The American Economic Review, 84(2), 238-243.
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