The controversy of composite indices

GDP has long been the single number that is most used to gauge living standards around the globe. As the world becomes increasingly conscious of the shortcomings of our best current measures of progress, efforts are underway to create new ways of measuring the human condition—ones that are more conscious of social and environmental factors but can still be represented in a single, attention-capturing number. Composite indices like UNDP’s Human Development Index (HDI), the OECD Better Life Index and Yale’s Environmental Performance Index attempt to do just that—capturing a wider range of factors that contribute to human quality of life. But Martin Ravallion of the World Bank is deeply skeptical of such indices. In his 2010 article, Ravallion argues that:

Countries are increasingly being ranked by some new “mashup index of development,” defined as a composite index for which existing theory and practice provides little or no guidance to its design. Thus the index has an unusually large number of moving parts, which the producer is essentially free to set. The parsimony of these indices is often appealing — collapsing multiple dimensions into just one, yielding unambiguous country rankings, and possibly reducing concerns about measurement errors in the component series.[1]

A tool to start the conversation

Ravallion’s concern is justified. He notes that the tradeoffs implied in such indices can sometimes be troubling–in a previous article he finds that the implied value of human life in the HDI ranges from unacceptably low in poor countries to many times GDP in wealthier ones. But I’d argue that so long as composite indices are used as the jumping off point for a deeper conversation, much can be gained from harnessing their attention-capturing power.

Composite indices have an important role in getting the conversation started: in the age of twitter, attention spans tend towards 140 characters and few policymakers have the time to sit down and read a policy brief. However, in a few seconds one number from a composite index—the country’s rank among peers—sends a powerful message. Dig just one layer deeper into an index’s component scores and a it flags areas where a country does relatively poorly, so that policymakers can focus efforts on improving their worse performance vis a vis peer countries. Composite indices are unique among research products in their ability to capture even short attention spans and catalyze policy action.

Composite indices are nonsense

In a certain way, composite indices are nonsense. They bring together an assortment of issues into a single, unitless measure. But they reflect the nonsense of our reality: that policymakers are expected to balance many competing priorities determined by an abstract concept of social welfare and that are essentially non-substitutable. The extent to which composite indices are nonsense is only the extent to which they reflect the real, difficult choices that policymakers must make. And if composite indices are used as one tool among many—as a snapshot of policymaker performance across the issues that experts think matter most, and a tool for focusing efforts—they can provide valuable context for policy action.

[1] Ravallion, M. (2010). “Mashup indices of development.”