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.
