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CHAPTER 02 LITERATURE REVIEW on PROSPERITY INDICATORS 2.1 Introduction a Healthy, Wealthy and Happy People Constitute a Prospero

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CHAPTER 02 LITERATURE REVIEW on PROSPERITY INDICATORS 2.1 Introduction a Healthy, Wealthy and Happy People Constitute a Prospero CHAPTER 02 LITERATURE REVIEW ON PROSPERITY INDICATORS 2.1 Introduction A healthy, wealthy and happy people constitute a prosperous nation. The term prosperity has a wider meaning: enhancement of the quality of life of people through sustainable wealth creation and inclusion of all segments of the society in enjoying the benefits of development for which an inalienable pre requisite is the balanced regional development (Somapala, 2008). Accurately assessing the wellbeing of an entire society is no simple matter, as tempting to focus on purely financial measures, which have become easily available in recent years. But if we take the life satisfaction into account, we should consider a broader concept, which is known as prosperity (Legatum Institute, 2011). Many countries have developed prosperity indicators specific to their social, political and economical context. 2.1.1 Principles of prosperity According to the Legatum Institute (2011) there are general principles relevant to the promotion of national prosperity. These are: • Freedom of choice is crucial • For very poor countries, raising incomes is the first priority • Money matters to people, but only up to a point • Growth in invested capital is the strongest driver of long term economic growth 6 • Dependence on foreign development aid reduces long term growth rates • Open economies in which foreign direct investment and international trade play larger roles have higher long term growth rates • Lower costs of bureaucracy increase economic growth rates (Legatum Institute, 2011) 2.2 Economic Development. Economic development is defined as the development of economy of countries or regions for the well-being of their inhabitants. It is the process by which a nation improves the economic, political, and social well being of its people. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base (Sheffrin, 2003). Economic development also refers to improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP is a specific measure of economic welfare that does not take into account important aspects such as leisure time, environmental quality, freedom or social justice (Beyond Economic Growth Student Book, 2011). There are several indicators available to measure economic development. Different composite measures have been developed that take into account the multidimensional character of development (Kruijk and Rutten, 2007). The indicators are Gross National Product (GNP), 7 Physical Quality of Life Index (PQLI), Human Development Index (HDI), Gender Development Index (GDI) and the Human Poverty Index (HPI) of the UNDP. The above measures are able to account for the fact that poverty is not only associated with respect to insufficient income or consumption, but also with insufficient outcomes with respect to education, health, insecurity, lack of social relations, lack of human rights activism and so on (Kruijk and Rutten, 2007). The estimation of Human Development Index (HDI) at regional level has been done for different states of India by Shivakumar (1991). The estimation of Human Poverty Index (HPI) at regional level was done for different states of India by Krishnaji (1997). 2.3 Gross Domestic Product (GDP) Measures of national income and output are used in economics to estimate the welfare of an economy through totaling the value of goods and services produced in the economy. The primary measures of national income and output are Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP) and the Net National Income (NNI). Among these GDP is used to measure the wealth of the country (Federal Reserve Statistical Release, 2011). There are three main ways of calculating the GDP. They are the output approach, income approach and the expenditure approach. Among these methods the expenditure approach is the most popular national output accounting method. The basic formula for calculating the GDP (Federal Reserve Statistical Release, 2011) is given by equation 2.1 GDP = C + / + G + (X- M). (2.1) 8 : { Where, C = Household consumption expenditure/ Personal consumption expenditure, / = Gross private domestic investment, G = Government consumption and gross investment expenditure, X = Gross exports of goods and services and M = Gross imports of goods and services. GDP places too much emphasis on consumption and ignores the wealth distribution. Importantly it also takes no account of environmental issues. GDP expresses the content of physical flows of “capital, industrial production, services, resources and agricultural product”. But GDP might not be a good wealth rate measure because it does not take into account the following: • the housework value • the effect of wealth distribution and income on individual people’s wealth • ignores affluence decline as a result of the environmental destruction • doubtfully supposes “ defensive expenses” as a contribution to affluence (Mederly, 2003) Due to the shortcomings of the GDP as a indicator of economic development, “Human Development Index” was proposed by the United Nations Development Programme(UNDP) in its Human Development Report 1990 (UNDP, 1990). ■ Tirs \ »• 9 l a* * 5 2.4 Human Development Index (HDI) In the Human Development Report, Human development is defined as “a process of enlarging people’s choices”. According to the Human Development Report, this is accomplished most fundamentally by living a long and healthy life, being educated, and having a decent standard of living; and it is both augmented and facilitated by political freedom, guaranteed human rights, and person self respect(Kelley, 1991). Human Development could also be defined as a development paradigm that is about much more than just the rise or fall of national incomes. It is about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests. People are the real wealth of nations. Development is thus about expanding the choices people have to lead lives they value (UNDP, 1998). Human Development Index could be used for different purposes. Primarily it could be used to, • Capture the attention of policy makers, media and NGOs and to draw their attention away from the more usual economic statistics and focus instead on human outcomes. The HDI was created to re-emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth. • The second purpose is to question national policy choices - asking how two countries with the same level of income per person can end up with such different human development outcomes (HDI levels). • The third purpose is to highlight wide differences within countries, between provinces or states, across gender, ethnicity, and other socioeconomic groupings. Highlighting internal disparities along these lines has raised national debate in many countries (UNDP, 1997). 10 :TIuman Development Index” is a composite of life expectancy at birth, adult literacy, and real gross domestic product per capita (Kelley, 1991). The life expectancy at birth captures several aspects of welfare because of its close correlation with nutrition, health, and other important biological and social achievements (Shivakumar, 1991). The adult literacy measures on how many adults can read and write in a particular nation (UNDP, 1997). The GDP measures the consumer buying power across the country. This is facilitated by using a “purchasing power parity index” (Kelley, 1991). The logarithm of per capita income is taken to reflect the conversion of income into good living (Shivakumar, 1991). In order to construct the Human Development Index (HDI), the first step is to specify a minimum value (the maximum deprivation set to one) and a maximum value (no deprivation equal to zero) for life expectancy^), literacy(X2);<and the log of real GDP per capita (X3)(Shivakumar, 1991).Then the deprivation index is computed for each indicator of human development using equation 2.2. (maxXij - Xij) DiJ = (2.2) (maxXij —min Xij) Where, DtJ - deprivation index of;th variable for £th country(/ = 1,2,3), max X^ - maximum value of j,th variable for £Ul country, X^ - value of jlh variable for Ith country and min X^ - minimum value of jih variable for Ith country. 11 Then a “Composite Deprivation Index” (CDI) of the three indicators is obtained by simple averaging (Kelley, 1991). Then the Human Development Index (HDI) is obtained by subtracting the composite deprivation from unity (Kelley, 1991). For the ith country, CDIi = “E/=i Dij (2.3) HDIi = 1 - CDIt (2.4) However there are several arguments against Human Development Index (HDI), which says that it is not enough to measure a country’s level of development. Because the concept of human development is much broader than what can be captured in the HDI, or any other of the composite indices in this report. The HDI, for example, does not reflect political participation or gender inequalities. The HDI and the other composite indices can only offer a broad proxy on some of the key the issues of human development, gender disparity, and human poverty. A complete picture of a country's level of human development requires analysis of other human development indicators and information (UNDP, 1996). 2.5 Poverty In the 1970’s poverty was defined in financial terms only. Accordingly weak purchasing power, or low per capita income was conventionally widely accepted as the main indicator for poverty. As a result of experience and world-wide discussion, the World Bank included social aspects in their definition of poverty, defining it as the inability to achieve a minimum standard of living. In spite of this, world-wide poverty lines were still defined as monetary poverty lines, leading to a 12 discrepancy between definition of poverty and related indicators for monitoring purposes JR-einhard and Wijeratne, 2000). As a possible solution for this dilemma, the concept of “basic needs” was suggested.
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