Unidimensional Indicators A monetary variable:

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1 Prof. Elisabetta CROCI ANGELINI Macerata University A.A DEVELOPMENT Economics: module Inequality/4 The question: is inequality increasing? decreasing? Milanovic s global unidimensional measurement Combining two inequality levels between countries (international inequality) within countries (individual inequality) Assessing Global and International inequality 2 Unidimensional Indicators A monetary variable: Income disposable income Expenditure excludes savings and investment The evaluation depends on the market dimension based on what can be bought and sold for a price The aim of measurement reflects its results what the list includes and excludes and what should be included and excluded 3 a plurality of indicators to be employed alternatively the method is simple: choose one, but the choice of the indicator could imply a ideologic risk complementarily how can we integrate heterogeneous indicators to define a synthetic indicator? choices, more often than not, tend to imply arbitrariety 4 Multidimensional Indicators include many interdependent elements: Monetary command over resources Health nutrition, safety, longevity Education enrollment, alfabetization Housing shelter Functionings & capabilities The interdependence makes the identification of a synthetic indicator difficult Empirical inconclusiveness Sources of inadequacy: Definitions income=gdp, expenditure Measurement : Indicators Lorenz, Gini, Dimensions uni-, multi- Concepts inequality, polarization Analysis level individuals, countries What are we looking for? 5 6 1

2 Different ways to address the inequality issue Theory Change in paradigm Sen s capability approach Measurement : Unidimensional combine countries and individuals into global evaluation Milanovic Multidimensional UNDP Human Development Index Capabilities assessment of the standard of living should focus on neither commodities, nor characteristics (in the sense of Gorman and Lancaster) nor utility, but something that may be called a person s capability (Sen, 1983, p.160) capability may generate utility, but it is the capability to function that comes closest to the notion of standard of living 7 8 an alternative paradigm Objective capabilities expansion, rather than maximizing per capita GDP Multidimensional trade-offs are value judgments, no optimization Shifts boundary of politics and economics many economic judgments need be subject to explicit public scrutiny and debate Sen s Capabilities Approach Capability freedom to achieve valuable beings and doings: Freedom of choice (objectivist approach) achievement (subjectivist approach) valuable beings and doings (functionings) 9 10 Functionings the various things a person may value doing or being elementary (being nourished, able to move) complex (self-respect, appear in public without shame) functionings are constitutive of a person s being. Achieved Functionings: should be measurable, observable, comparable. Examples: literacy; life expectancy. Capability represents the various combinations of functionings (beings and doings) that a person can achieve... is a set of vectors of functionings, reflecting the person s freedom to lead one type of life or another... to choose from possible livings. (IR p. 40)

3 Evaluating capabilities Does freedom of choice relative to an opportunity set depend on the individual preferences on elements of the set? Depending on the answer, we can distinguish an objectivist and a subjectivist approach. objectivist approach, the budget constraint identifies the opportunity set available for an individual, given his income and market prices. subjectivist approach could identify freedom of choice with the dimension of the equivalence class of options, available for a given level of utility. 13 Evaluating capabilities Even if individuals have the same income, they may find a constraint to effective wellbeing in their different consumption technology. If the target represents the minimal level of functionings, required by an hypothetical social planner for each individual, personal well-being is computed by taking into account the deprivation in achieving such a minimal level. 14 Participation also has intrinsic value for the quality of life. Indeed being able to do something not only for oneself but also for other members of the society is one of the elementary freedoms which people have reason to value. The popular appeal of many social movements in India confirms that this basic capability is highly valued even among people who lead very deprived lives in material terms. (Dreze and Sen 1995:106) The difficulty stems from contradictory movements Greater inequality within nations Greater differences between countries mean incomes (the US vs. Africa) But catching up of large and poor countries All of these forces determine what happens to GLOBAL INEQUALITY multidimensionality Human Development as an alternative development paradigm its antecedents: Basic Needs, Capabilities Colonial legacy (low incomes savings and investment, appalling health, low literacy, primary production, total dependency) What difference does it make How does it relate to economic growth? 17 HDR 2004 p. 127 People are the real wealth of nations. Indeed, the basic purpose of development is to enlarge human freedoms. The process of development can expand human capabilities by expanding the choices that people have to live full and creative lives. And people are both the beneficiaries of such development and the agents of the progress and change that bring it about. This process must benefit all individuals equitably and build on the participation of each of them. This approach to development human development has been advocated by every Human Development Report since the first in

4 What is HD? Puts human at the centre, not incomes people are the real wealth of a nation. The basic objective of development is to create an enabling environment for people to live long, healthy and creative lives (HDRO 1990) Kant: so act as to treat humanity, whether in their own person or that of any other, in every case as an end withal, never as a means only Human development is a process of enlarging people s choices. The most critical ones are to lead a long and healthy life, to be educated and to enjoy a decent standard of living. Additional choices include political freedom, guaranteed human rights and selfrespect (HDRO 1990) Some key aspects of HD 1. Humans are ends not means 2. In practice major focus is on BN type goods and services, but also discusses other issues (freedom, democracy, gender, environment, communities) it is open ended. Considers topics relevant to more developed countries. All issues brought in which may affect human being s potential. 3. Freedom to choose given priority I.e. HD concerns widening human choices. 4. Incomes are means not end. 5. Humans are an important resource too as well as being the objective of development Measuring Human Development Decision to attempt to measure it controversial Intrinsic problems with any measure: - which dimensions to include; - scale of measurement to use; - how to weight elements. any solution criticised as arbitrary Yet GNP has many defects; need an alternative measure Human Development Index Work still in progress. Three dimensions life expectancy education/literacy adjusted incomes Easy to criticise But HDI has played an important role Yet, the idea of HD goes well beyond HDI What is HDI Average achievements of a country in three basic dimensions of HD: Long and health life (measured by Life Expectancy) Knowledge (measured by adult literacy (2/3) and combined primary,secondary and tertiary gross enrolment (1/3)) Decent standard of living (measured by GDP per capita, $PPP) Countries ranking ( and policies) 23 interrelationship [...], there may be some accentuation of inequality due to the coupling of (i) income inequality and (ii) unequal advantages in converting incomes into capabilities, the two together intensifying the problem of inequality in terms of opportunity - freedoms. Those who are disabled, or ill, or old or otherwise handicapped may have, on one hand, problems in earning a decent income, and on the other, also face greater difficulties in converting income into capabilities to live well. The same factors that may make a person unable to find a good job and a good income may put the person at a disadvantage in achieving a good quality of life even for the same job and the same income.(sen, p. 536) 24 4

5 Correlations in 2000 Countries HD/GNP HD/LE LE/GNP All countries Developed To note Correlation between Life Expectancy and GNP weaker than between HDI and GNP For low HD countries especially weak correlation between HDI/GNP Developing and transition Low HD Countries with major difference in ranking, on HDI compared with GNP per capita 1. HD ranking higher than GNP Socialist and ex-socialist (e.g. Ukraine) Social democrat, strong emphasis on social sectors (e.g. Sweden, Costa Rica) Failed economies (Congo, Lebanon) 2. GNP ranking higher than HD Oil economies (e.g. Saudi Arabia; Gabon) AIDS affected (Guinea; Burkina Faso) Human Development Report Sustainability and Equity: A Better Future for All Table 1 - Human Development Index and its components a 2011a 2011 Human Development Index (HDI) Life expectancy at birth Mean years of schooling Expected years of schooling Gross National Income (GNI) per capita HDI rank Value (years) (years) (years) (Constant 2005 PPP$) 1 Norway 0,943 81,1 12,6 17, Netherlands 0,910 80,7 11,6 16, United States 0,910 78,5 12,4 16, Ireland 0,908 80,6 11,6 18, Germany 0,905 80,4 12,2 15, Sweden 0,904 81,4 11,7 15, Japan 0,901 83,4 11,6 15, Denmark 0,895 78,8 11,4 16, Belgium 0,886 80,0 10,9 16, Austria 0,885 80,9 10,8 15, France 0,884 81,5 10,6 16, Slovenia 0,884 79,3 11,6 16, Finland 0,882 80,0 10,3 16, Spain 0,878 81,4 10,4 16, Italy 0,874 81,9 10,1 16, Luxembourg 0,867 80,0 10,1 13, Czech Republic 0,865 77,7 12,3 15, United Kingdom 0,863 80,2 9,3 16, Greece 0,861 79,9 10,1 16, Cyprus 0,840 79,6 9,8 14, Estonia 0,835 74,8 12,0 15, Slovakia 0,834 75,4 11,6 14, Malta 0,832 79,6 9,9 14, Hungary 0,816 74,4 11,1 15, Poland 0,813 76,1 10,0 15, Lithuania 0,810 72,2 10,9 16, Portugal 0,809 79,5 7,7 15, Latvia 0,805 73,3 11,5 15, Romania 0,781 74,0 10,4 14, Bulgaria 0,771 73,4 10,6 13, ,0 Real GDP growth rate -1 year % change Czech Republic Denmark 10,0 Germany Estonia Ireland Greece 5,0 Spain France Croatia Italy 0,0 Cyprus Latvia Lithuania Luxembourg -5,0 Hungary Malta Netherlands Austria -10,0 Poland Portugal Romania -15,0 Slovenia Slovakia Finland Sweden -20,0 United Kingdom 29 Belgium Bulgaria Policy lessons Many paths to HD success including - good growth; - good distribution of income - well targeted social expenditures. But in general successes - give priority to girls and women (education/incomes) - have high social expenditures as share of national income 30 5

6 Growth and HD: the strong connections Growth feeds into promotion of HD via social and private expenditure, depending on how high government expenditure is and how it is distributed, and on distribution of household incomes. Good HD feeds into growth because healthier, better educated and better nourished people are more productive. Empirical evidence supports the two-way relationship Hence vicious or virtuous cycles of development. Majority of countries fall into virtuous or vicious categories Three results HD must be given priority for growth as well as being the fundamental aim of development. Enhancing the role of women is a critical input into HD (as well as part of the objective). Human development goes well beyond the HDI. Adding more dimensions Income how much does money buy health, shelter and education? Health a good health enables to get more money and education Education a good education enables to get more money and keep healthy Cross correlation is a big problem in evaluating more dimensions Tentative conclusions Inequality matters for growth, but the complex relationship is likely to be idiosyncratic open to vicious and virtuous circles sensitive to extreme values (eg. poverty) Progress still to be made in inequality assessment concepts measurement Tentative conclusions Aims and tools are interconnected Macro and micro levels to be considered Multidimensional evaluations still on the way the analysis of multidimensional inequality is in its infancy John A. Weymark, 2003 Results, although idiosyncratic, may be important for policies