The human development index as a criterion for optimal planning

Purpose – The human development index (HDI) and gender‐related development index (GDI) have become accepted as leading measures for ranking human well being in different countries. The purpose of this paper is to identify the planning policies that improve these indices and to also suggest modifications to the indices that yield more sensible policies. Design/methodology/approach – This paper solves the first‐best welfare problem in which the planner maximizes a development index subject to resource constraints. Findings – Planning strategies that maximize the HDI tend towards minimizing consumption and maximizing expenditures on education and health. Interestingly, such strategies also tend towards equitable allocations, even though inequality aversion is not modelled in the HDI. The paper shows that the GDI generates optimal plans with similar properties, and determine when the GDI and HDI generate consistent optimal plans. A problematic feature of the optimal plans is that the income component in the HDI (or GDI) does not play its intended role of securing resources for a decent standard of living. Rather, it acts to distort the allocation between health and education expenditure. The paper argues that it is better to drop income from the index. Alternatively, the paper considers net income, income net of education and health expenditures, as indicating capabilities not already reflected in the index. Finally, it compares how the modified indices and the HDI rank countries. Originality/value – The paper is believed to be the first to integrate development indices into national development planning.