TECHNICAL ANNEX V

Computing the Human Development Index

The Human Development Index is based on three indicators: longevity, as measured by life expectancy at birth; education, as measured by a combination of adult literacy (66 percent) and the combined gross primary, secondary, and tertiary enrollment ratio (33 percent); and standard of living, as measured by Real GDP per capita at Purchasing Parity Prices in U.S. dollars. Because this data is not always available for all countries for the year before, the HDI has a two-year time lag. Thus the construction of the 2001 HDI uses data from 1999.

There are fixed maximum and minimum values established for each of these indicators:

For any component of the HDI formula, the index can be computed according to the general formula:

If for example, if the life expectancy at birth for Georgia is 65 years, the index of life expectancy would be:

Finally, the Human Development Index is an average of the life expectancy index, the adult literacy index, and the adjusted real GDP per capita (PPP$) index. It is derived by dividing the sum of these three indices by 3.

Treatment of Income in the Human Development Index

Income enters into the HDI as a surrogate for those dimensions of human development that are reflected neither in a long and healthy life, nor in the level of knowledge a person attains. It is a proxy for a decent standard of living. The basic approach to the HDI’s treatment of income has been driven by the fact that achieving a respectable level of human development does not require unlimited income. To reflect this, income has always been discounted in calculating the HDI. By "discounting" income, the HDI reflects the fact that the additional income for a rich individual is of less value than for a poor one. In other words, an additional $50 dollars for an individual earning an income of $50 is of much more value than the same additional amount ($50) for an individual that is already earning $500. How should income be discounted and at what level?

A thorough review of the treatment of income in the HDI was undertaken based on the work of Anand and Sen. For reasons of space, we will only introduce the new formula here.

For readers interested in accessing the old formula, we recommend obtaining a copy of the 1998 NHDR (available at www.undp.org). To summarize, the HDI accounts for income according to the following formula:

W(y) =

There are several advantages to this formula. First, it does not discount income as severely as the previously used formula. Second, it discounts all income, not just the income above a certain level. Third, the asymptote starts quite late, so middle income countries are not penalized unduly. As income rises further in these countries, they will continue to receive recognition for their increasing income as a potential means for further human development. For further description, see Anand, Sudhir and Amartya Sen, 1999. "The Income Component in the HDI – Alternative Formulations". Occasional Paper. United Nations Development Programme. Human Development Report Office. New York (available at www.undp.org).

Estimation of the GDP index in the regional Human Development Index for Georgia 2001

The lack of estimations of GDP per region obliged this National Human Development Report to deviate from the standard method in computing the HDI index. The lack of GDP data at the regional level simply reflects the problem of estimating national GDP, a figure that has undergone several revisions in past years. It varies depending on the source cited and generates some doubts about its accuracy. So far, the problems encountered in estimating national GDP appear to have deterred efforts to disaggregate the figure at the regional level.

Because the HDI uses GDP per capita as a proxy of a decent standard of living, changes to the construction of the GDP index should continue to reflect regional differences in living standards. In doing so, we build upon the approach applied by our colleagues in the UNDP office in India. There, in Karnataka and Tamil Nadu, the income component of the HDI has been calculated using per capita district income adjusted for PPP. The NHDR-Georgia introduces a slight modification to this method by taking the share of regional household spending over national household spending as a proxy of regional shares in GDP. These shares of total spending have been multiplied by the latest estimation of national GDP and transformed into PPP values. Finally, these values are divided by the latest estimation of population in Georgian regions to obtain a proxy of regional GDP per capita.

There may be several potential advantages in using this method in the absence of regional GDP per capita figures. First, the use of spending per capita in the GDP index produces low values of GDP per capita, which in turn may distort the final absolute value of the HDI index as the latter is the simple average of the Life Expectancy Index Education Index, and GDP Index.

Second, the resulting regional values can be more easily compared to the national HDI assuming, of course, that no significant distortions arise from taking shares in total spending as indicators of regional GDP. The resulting GDP per capita figure obtained for Georgia is close to that found in the Human Development Report⁴⁸.