An Economic and Social Development Index

The measurement of economic and social development is one of the most hotly contested subjects in economics. Since the 1970s, it has become evident that it is necessary to use a composite index to capture various aspects of social and human development and to address related issues of inequality. Recently, the United Nations Development Programme (UNDP) (1990) constructed the Human Development Index (HDI), which has since become the standard. The HDI is the unweighted average of three separate indices (formed from four variables) which are designed to measure health and longevity, knowledge and communication, and access to goods. The HDI has been criticized on several grounds, from the choice of data and methods used to transform the data, to the index construction methodology itself. The main goal of this paper is to utilize a procedure that addresses many of the criticisms of the HDI. Specifically, this study uses a large number of variables to measure a wide spectrum of development characteristics, and employs the principal components procedure to determine the weights of the variables in the index. The principal components tool has been used in the development literature to measure particular components of the development process, and was first suggested by Ram (1982) to measure development as a whole. However, it has not been used to measure development on a large scale. Cahill and Sanchez (1999) applied this procedure to construct an economic and social development index (ESDI) for Latin American countries and U.S. states, and found some statistically different results than the HDI. This paper will construct an ESDI for a much larger sample of countries around the world.