1
European Economic and Social Committee
Brussels, 8 October 2012
12th EU-China Round Table
Report on
Surpassing GDP: The New Version of Human Development Index
_____________
Rapporteur: He Chuanqi, China Center for Modernization Research, CAS
_____________
1. Significance and limitations of GDP 1.1 What is GDP?
1.2 Significance of GDP 1.3 Limitations of GDP
2. Human Development Index (HDI) 2.1 What is HDI?
2.2 Advantages of HDI 2.3 Limitations of HDI
3. The New Version of Human Development Index (HDIN) 3.1 What is HDIN?
3.2 Advantages of HDIN
3.3 Limitations of HDIN
4. Comparison between China and EU 4.1 HDIN of China and EU
4.2 Comparison between China and EU 5. Related policies
5.1 GDP related policies 5.2 HDI related policies 5.3 HDIN related policies 6．．．． Annexes
Annex 1 HDIN of 134 countries in 2010 Annex 2 HDIN trends from 1980 to 2010
The concept of GDP (gross domestic product) was first proposed in the 1930s by an American scholar.
GDP refers to the total market value of all officially recorded final goods and services produced in a country in a period. It is a key indicator of macro economy, involving national economic scale, production structure, income structure and expenditure structure. Later in the 1990s, UNDP put forward the concept of HDI (Human Development Index), an index that measures level of human development and covers three aspects of human development, namely a long and healthy life, access to knowledge and a decent standard of living (GDP per capita). In 2010, Chinese scholars brought forward the concept of HDIN (the new version of Human Development Index), an index that gauges the level of human development in the information age and involves five aspects of human development, including a long and healthy life, access to knowledge, access to information, environmental friendship and an affluent living.
The evolution from GDP to HDI and HDIN reflects the deepening of our understanding on development issue. Development includes not only economic growth, but also social progress, environmental friendliness and comprehensive development of human. Differences among and meanings of the three indices will be discussed in the article.
1. Significance and limitations of GDP
1.1 What is GDP?1.1.1 History of GDP
In 1937, US economist Simon Kuznets submitted to the United States Congress a research report National Income: 1929-35, proposing use of GDP to measure all economic productions of a country.
In 1944, the international financial system, including World Bank and International Monetary Fund, was established in the Bretton Woods conference. And later, GDP became a universal index for measurement of national economy.
1.1.2 Meaning of GDP
GDP (gross domestic product) is used as a macro economic index to measure the total market value of all officially recorded final goods and services produced in a region (such as a country) in a given period, and it excludes value of intermediate input in the production process.
GDP (gross domestic product) is closely related with GNP (gross national product) and GNI (gross national income). GDP defines its scope according to location, while GNP and GNI define its scope according to ownership or citizens.
GDP is product produced within a country's borders in a given period, and includes the value created by both domestic and foreign citizens in a certain region.
GNP is product produced by enterprises owned by a country's citizens in a given period, and includes all the value created by its citizens both at home and abroad, and excluding the value created by foreign citizens who resides in the country.
GNI refers to total income obtained by citizens of a country in a given period (such as a year),
Generally, GNP = GNI = GDP + net primary incomes from the rest of the world.
1.1.3 Calculation methods of GDP
There are three known methods to calculate GDP: the product approach, the income approach and the expenditure approach.
(1) The product approach is used to calculate the sum of value added of all industries in the national economy from the perspective of production.
Calculating formula:
GDP = ∑Value added of all industries = ∑Output of all industries – ∑Intermediate consumption of all industries.
(2) The income approach is used to calculate the total income of all factors of production from the perspective of income distribution.
Calculating formula:
GDP = Compensation of employees + Gross operating surplus and Gross mixed incomes + net product tax (Taxes less subsides on production and imports) + fixed assets depreciation.
(3) The expenditure approach is used to calculate final use of all products and services from the perspective of ultimate use.
Calculating formula:
GDP = Final consumption + Gross capital formation + Net export of products and services GDP = Private consumption + Total investment + Government expenditures + Net export
1.2 Significance of GDP
First, GDP can reflect the economic scale of a country.
Second, Growth rate of GDP and GDP per capita can reflect change and fluctuation of the national economy.
Third, GDP can be used to analyze industrial structure of the national economy, such as structures of agriculture, industry and tertiary industry.
Fourth, GDP can be used to analyze income structure of the national income, such as proportions of labor remuneration, capital income and tax.
Fifth, GDP can be used to analyze expenditure structure of the national economy, such as proportions of consumption, investment and net export.
Sixth, GDP per capita and GDP per capita per hour of employees can reflect the level of economic developing and the level of labor productivity.
Besides, indices such as GDP, GDP per capita, GDP growth rate and GDP deflator are commonly used for macro economic analysis and for global comparison and research on international relationship.
1.3 Limitations of GDP
First, GDP cannot reflect the cost of resource and environment for economic growth.
Second, GDP cannot reflect quality of economic growth, such as proportions of new technologies and new products.
Third, GDP cannot reflect wealth stock and fairness of income distribution.
Fourth, GDP cannot reflect total output of economic activities, such as non-market economy, underground economy and non-money economy.
Fifth, GDP cannot reflect total value of public services such as education service etc., but measures value of public services with their cost.
Sixth, GDP cannot reflect wealth increment, such as GDP created in dismantling houses and that created in building houses.
As a macro economic index, GDP can reflect some achievements in economic growth, but cannot reflect achievements in social progress, environmental change, life quality improvement and human development.
GDP is subject to many controversies and criticism, and new measurements keep emerging, such as Human Development Index (HDI), Genuine Progress Indicator (GPI), Gross National Happiness (RNH), European Quality of Life Survey (EQOLS), OECD Better Life Index (BLI), Future Opportunity Index (FOI) and the new version of Human Development Index (HDIN).
2. Human Development Index (HDI)
2.1 What is HDI?In 1990, UNDP issued Human Development Report for the first time, in which the concept of Human Development Index (HDI) was proposed. Since then, UNDP put forward several other indices such as Inequality-adjusted Human Development Index (IHDI), Gender Inequality Index (GII) and Multidimensional Poverty Index (MPI) etc.
Human Development Index (HDI) is a type of comprehensive evaluation on the level of human development, and measures average achievements of a country from three basic dimensions of human development, namely, a long and healthy life, access to knowledge and a decent standard of living (Table 1). Achievement in each dimension is expressed by a value between 0 and 1, and HDI is the geometric mean of indices in the three dimensions (Table 2).
Table 1 Evaluation dimensions and indices of HDI
Version A long and healthy life Access to knowledge A decent standard of living
1990 Life expectancy at birth Adult literacy rate GDP per capita (PPP $)
1991 Life expectancy at birth Adult literacy rate, mean years of schooling
GDP per capita (PPP $)
1994 Life expectancy at birth Adult literacy rate, comprehensive enrollment rate
GDP per capita (PPP $)
2011 Life expectancy at birth Mean years of schooling, expected years of schooling
GNI per capita (Constant 2005 PPP $)
Note: Since 1990, HDI evaluation indices and methods have been adjusted many times. PPP means purchasing power parity, and international dollar is used as unit.
Table 2 Evaluation model of HDI (2011 version)
Index Maximum Minimum Calculating method
Life expectancy Actual maximum of the year
20 years old
Life expectancy index= (actual value – 20) ÷ (maximum - 20)
Mean years of schooling Expected years of schooling Combined education index Education index
Actual maximum of the year Actual maximum of the year Actual maximum of the year
0
0
0
Mean years of schooling index = (actual value - 0) ÷ (maximum - 0)
Expected years of schooling index= (actual value - 0) ÷ (maximum - 0)
Combined education index = (Mean years of schooling index ×Expected years of schooling index)1/2
Education index = (actual value of combined education index – 0) ÷ (maximum of combined education index – 0)
Per capita income (PPP $)
Actual maximum of the year
100 Income index = (ln (actual value) – ln(100)) ÷ (ln (maximum) – ln(100))
HDI 1 0 HDI = (Life expectancy index × Education index × Income index)1/3
Note: Income per capita is calculated on the basis of constant 2005 PPP dollar, and value of Napierian logarithm (ln) is adopted for evaluation.
UNDP believes that a decent standard of living doesn’t require limitless income, and therefore adjustment can be made to income. Value of Napierian logarithm of income per capita is adopted to calculate income index.
2.2 Advantages of HDI
First, HDI can reflect average achievements in a country in three basic dimensions of human development: a long and healthy life, access to knowledge and a decent standard of living, involving progress in economy, society and knowledge.
Second, HDI can be easily calculated, producing accessible data.
Third, cross-national comparison on HDI is not subject to influence of size of countries.
2.3 Limitations of HDI
First, HDI fails to reflect features of the information age. Development level of people who aren’t able to use Internet will be restricted.
Second, HDI fails to reflect environmental sustainability. Environmental protection and ecological consideration have won wide recognition of the international community.
Third, HDI fails to reflect features of knowledge economy. With higher education gradually popularized, knowledge industry has surpassed traditional industries.
The existing HDI evaluation indices don’t include information index and environment index, while knowledge index doesn’t receive enough focus; higher education index is concealed in the two education indices.
3. The new version of Human Development Index (HDI
N)
3.1 What is HDIN?In 2010, Professor He Chuanqi in Chinese Academy of Sciences, analyzed advantages and limitations of Human Development Index in China Modernization Report 2010: Outline of World Modernization, and proposed the new version of Human Development Index (HDIN). He believes that modernization is a global phenomenon and trend since the 18th century, and the frontier changes of human civilization and international competition. In the period from the 18th to the 21st century, world modernization has been evolving in two stages. Modernization in the first stage was the transformation from agricultural society and economy to industrial society and economy, and the process was featured by industrialization, urbanization and democratization etc.; in the second stage it is the transformation from industrial society and economy to knowledge society and economy, and the process is featured by knowledge-intensive, information and ecologication (Table 3). Human Development Index proposed by UNDP includes indices on economy, society and knowledge, but fails to include indices on information and environment. Therefore, it is applicable to evaluation of human development during the first stage of modernization, and can reflect human development level in the industrial age.
However, it is not applicable to human development during the second stage of modernization, and cannot fully reflect features of human development in the age of knowledge economy.
Table 3 Frontier process of world modernization
Item First modernization Second modernization
Approximate period 1763～1970 1970～2100
Approximate content The changes and transformation from traditional agricultural civilization to modern industrial civilization, including the transformation from agricultural economy, society, politics and culture to industrial economy, society, politics and culture
The changes and transformation from industrial civilization to knowledge and ecological civilization, including the transformation from industrial economy, society, politics and culture to knowledge economy, society, politics and knowledge/ecological culture Main features Industrialization, urbanization, democratization,
rationalization, decreasing of proportion of agriculture
Knowledge intensive, information and ecologication, globalization, decreasing of proportion of industry Level in 2010 Over 90 countries were in the first stage of
modernization.
Over 20 countries are in the second stage of modernization.
The new version of Human Development Index (HDIN) measures average achievements of a country in five basic aspects of human development (Table 4): ① a long and healthy life, indicated by life expectancy at birth; ② access to knowledge, indicated by enrollment rate of tertiary education; ③
