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The Effect of HDI Value on a Country’s Economy

Bangladesh Perspective

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The Effect of HDI Value on a Country’s Economy
Bangladesh Perspective

Submitted to:
MD. Kaysher Hamid
Lecturer
Department of Business Administration- General, FBS, BUP

Submitted by:
Nabil Bin Saif, ID- B18231028
MD. Sharier Alam, ID- B18231074
Yusuf Mahmood Pranto, ID- B17231036 (17 batch)

Batch: BBA General 2018


Section: B
Department: Faculty of Business Studies

Date of Submission: 15th May 2020

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Acknowledgement

At first, we take this opportunity to express our profound gratitude and humble
submission to the almighty Allah without whose support; we would not able to
complete a huge task of preparing this term paper within the scheduled time.

We also take this opportunity to express our deep regards and gratitude to our
course teacher Md. Kaysher Hamid, Lecturer, Department of Business
Administration-General, Bangladesh University of Professionals (BUP), for his
exemplary guidance, monitoring and constant encouragement throughout the
working period of this term paper. The blessing, help and guidance given by him
time to time shall carry us a long way in the journey of life.

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Letter of Transmittal

May 10, 2020

Md. Kaysher Hamid


Lecturer
Department of Business Administration-General
Department of Business Administration- General, FBS, BUP

Subject: For the acceptance of term paper

Respected Sir,

We, Nabil Bin Saif, MD. Sharier Alam and Yusuf Mahmood Pranto are submitting
our term paper on the topic, “The effect of HDL value on a country, Bangladesh
Perspective.” While preparing this term paper, we have followed your instructions
and guidelines with attention and diligence.
This report has been completed primarily with the combined effort of all group
members. We express our special gratitude to you for dedicating your valuable
time, expert guidance and support. We have tried our best to complete the report
appropriately as much as possible. We shall be pleased to answer any sort of query
you may have regarding this report.

We hope with great anticipation that you would like and accept our report, looking
forward to your co-operation.

Sincerely Yours,

Nabil Bin Saif, ID- B18231028


MD. Sharier Alam, ID- B182310
Yusuf Mahmood Pranto, ID- B17231036 (17 batch)

Batch: BBA General 2018, Section B


Department: Faculty of Business Studies

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Table of Contents

Chapter no Contents Page no


Executive Summary 6
Chapter - 1 1.0 Introduction 7
1.1 The Human Development Index 7
1.2 Who created HDI 7
1.3 What HDI represents 7
1.4 Inequality-adjusted Human 9
Development Index
Chapter -2 2.0 Relation Between HDI and 10
Economic Performances
2.1 Relation Between HDI and GDP 10
2.2 Literature Review 11
2.3 Methodology 13
2.3.1 Analytic Hierarchical Process 13
(AHP)
2.3.2 TOPSIS 14
2.3.3 Implementation and Result 15
Chapter - 3 3.0 HDI value and Bangladesh 18
3.1 Bangladesh HDI and economy 20
comparison in South-Asia
Chapter - 4 4.0 Conclusion 22

Executive Summary

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For a term paper assignment our team of three members was asked to prepare a
report that emphasizes on The Effect of Human Development Index (HDI) Value
on a Country’s Economy on the perspective of Bangladesh

This paper incorporates a concern for a statistic composite index of life


expectancy, education, and per capita income indicators, which are used to rank
countries into four tiers of human development by the United Nations
Development Program (UNDP)

The HDI index is based on the human development approach, often framed in
terms of whether people can "be" and "do" desirable things in life. Examples
include- Being: well fed, sheltered, healthy; Doing: work, education, voting,
participating in community life. A country scores a higher HDI when
the lifespan is higher, the education level is higher, and the gross national
income GNI (PPP) per capita is higher.

In this paper we have compared the relation between HDI and economic
performances. Also we have compared the relation between HDI and Gross
Domestic Product (GDP)

Two methods such as a) Analytic Hierarchy Process (AHP) and b) TOPSIS are
discussed and applied to the selected indicators to evaluate economic performance
of nations between the years 2010-2014. Based on the growth rate 20 European
countries which have highest GDP rates are included in this study. The analysis
was carried out by statistical software R and Excel, the weights were calculated by
AHP approach

From our research we have found that Bangladesh has moved one place up in the
UN Human Development Index or HDI in 2018 to rank 135th (from 136th in 2017)
out of 189 countries; however ranked lower than Sri Lanka, India, and Bhutan.
This steady progress was due to development, which had seen a reduction in
poverty, along with gains in life expectancy, education, and access to health care.
Bangladesh’s HDI value for 2018 was 0.614 – which put the country in the
medium human development category.

Bangladesh’s HDI value is below the average of 0.634 for countries in the medium
human development group and below the average of 0.642 for countries in South

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Asia. But when it comes to inequality, the situation is grim. As inequality in a
country increases, the loss in human development also increases.

In this report we will see how HDI value and economy are interrelated with one
another and helps for a country’s overall development.

1.0. Introduction

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1.1 The Human Development Index:
The Human Development Index (HDI) is an index that measures key dimensions
of human development. The three key dimensions are:1

– A long and healthy life – measured by life expectancy.

– Access to education – measured by expected years of schooling of children at


school-entry age and mean years of schooling of the adult population.

– And a decent standard of living – measured by Gross National Income per


capita adjusted for the price level of the country.

1.2 Who created HDI:


 Pakistani economist Mahbub ul Haq created HDI in 1990 which was further used
to measure the country's development by the United Nations Development
Program (UNDP). Calculation of the index combines four major indicators: life
expectancy for health, expected years of schooling, mean of years of schooling for
education and Gross National Income per capita for standard of living.

Every year UNDP ranks countries based on the HDI report released in their annual
report. HDI is one of the best tools to keep track of the level of development of a
country, as it combines all major social and economic indicators that are
responsible for economic development.

1.3 What HDI represents:


The Human Development Index (HDI) was created to emphasize that expanding
human choices should be the ultimate criteria for assessing development results.
Economic growth is a means to that process but is not an end in itself. The HDI
can also be used to question national policy choices, asking how two countries
with the same level of Gross National Income (GNI) per capita can end up with
different human development outcomes.
For example, Malaysia has GNI per capita higher than Chile, but in Malaysia, life
expectancy at birth is four years shorter and expecting years of schooling is 3 years

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less than in Chile, resulting in Chile having a higher HDI value than Malaysia.
These contrasts can stimulate debate about government policy priorities
The HDI was created to emphasize that people and their capabilities should be the
ultimate criteria for assessing the development of a country, not economic growth
alone. The HDI can also be used to question national policy choices, asking how
two countries with the same level of GNI per capita can end up with different
human development outcomes. These contrasts can stimulate debate about
government policy priorities.

Human Development Index (HDI)

The Human Development Index (HDI) is a summary measure of average


achievement in key dimensions of human development: a long and healthy life,
being knowledgeable and have a decent standard of living. The HDI is the
geometric mean of normalized indices for each of the three dimensions.

The health dimension is assessed by life expectancy at birth, the education


dimension is measured by mean of years of schooling for adults aged 25 years and
more and expected years of schooling for children of school entering age. The
standard of living dimension is measured by gross national income per capita. The
HDI uses the logarithm of income, to reflect the diminishing importance of income
with increasing GNI. The scores for the three HDI dimension indices are then
aggregated into a composite index using geometric mean.

1.4 Inequality-adjusted Human Development Index:

The IHDI combines a country’s average achievements in health, education and


income with how those achievements are distributed among country’s population

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by “discounting” each dimension’s average value according to its level of
inequality. Thus, the IHDI is distribution-sensitive average level of human
development. Two countries with different distributions of achievements can have
the same average HDI value. Under perfect equality the IHDI is equal to the HDI,
but falls below the HDI when inequality rises.

Inequality-adjusted Human Development Index

The difference between the IHDI and HDI is the human development cost of
inequality, also termed – the overall loss to human development due to inequality.
The IHDI allows a direct link to inequalities in dimensions, it can inform policies
towards inequality reduction, and leads to better understanding of inequalities
across population and their contribution to the overall human development cost. A
recent measure of inequality in the HDI, the Coefficient of human inequality, is
calculated as an unweighted average of inequality across three dimensions.

2.0 Relation Between HDI and Economic Performances

2.1 Relation Between HDI and GDP:


Human Development Index (HDI) is one of a variable that can influence the Gross
Domestic Product (GDP). Human Development Index can help to measure the

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country achievements in different areas and what we took is from health, education
and standard of living. We actually want to see what is the relationship between
GDP with HDI is and the poverty rate in Malaysia, we are using a secondary data
from year 1990 until year 2012. In this paper we are going to investigate the
relationship between Human Development Index and Gross Domestic Product,
identify another factor that could affect GDP which is Poverty reduction. There is a
relationship between Gross Domestic Product (GDP) and Human Development
Index (HDI). The component of Human Development Index (HDI) includes health,
education, and standard livings. Is there having the relationship between GDP and
HDI? We want to see whether another factor such as the poverty rate could affect
the GDP of the country. In this study we want to investigate the relationship
between Gross Domestic Product and Human Development Index and to identify
another factor that could affect GDP, for example Poverty rate.

In last decades, many countries have achieved varying levels of economic


developments. Furthermore, the development rate changes over time. For instance,
the rate is decreased if the country is developed. However, other factors are
important to understand the economic performance in such countries. Main
indicators of improvement play an important role for ranking in economic
performance in countries. In many countries, the conduct of a nation’s economic
policy usually has four goals: unemployment, trade balance, GDP per capita, and
inflation. The Organization for Economic Cooperation and Development (OECD)
generally used these indicators for calculating economic performances of
countries. Economic growth has impact on nation’s voice on an international scale
as well as competes with the other nations in other fields such as military, politics,
international treaty, and so on. The aim of this study is to deliver a report for
economic performance in 20 European countries between the years 2010–2014.
Our study utilises the Okun’s Misery Index, which comprises of unemployment
rate and inflation rate. Furthermore, we consider OECD’s magic diamond
measures which are growth of GDP, inflation rate, unemployment rate, and the
GDP-normalized trade balance. Five different indicators are used in this study to
evaluate economic performance for each nation. GDP per capita is considered as
one of the key indicators which is reflecting a society’s welfare and improvement
of global competitiveness. Youth unemployment has impact on nation’s economic
growth. Inflation as measured by the consumer price index reflects the annual

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percentage change in the cost to the average consumer of acquiring a basket of
goods and services that may be fixed or changed at specified intervals, such as
yearly. So that it is one of the important factors that affect economic performance.
We also consider current account balance and growth rate for economic
performance ranking. In this study, the weights of indicators are determined with
analytic hierarchy process (AHP) between the years 2010–2014. Economic
performances are calculated and ranked using the method called Technique for
Order Preference by Similarity to Ideal Solution (TOPSIS) approach. Furthermore,
results will be compared with mean of Human Development Index (HDI) for the
years 2010–2014.

2.2 Literature Review:


There are many studies in the literature-related economic performances. Some
studies had focused on economic growth rates of developing–developed countries,
and some of them had focused on region of nations. Literature review on economic
performances of different countries is as follows: Ashourian (2012) used multiple
attribute decision making (MADM) method to study the rank of performance of
selected Middle East and North Africa (MANA) countries. This approach is a
management science technique that is popularly used to rank indicated that the
MENA countries achieved higher values of desirable attributes. Cam et al. (2015)
analyzed financial performances of textile firms publicly traded in The Borsa
Istanbul via TOPSIS method by using financial rates in 2010–2013. They
calculated rates for financial performance and measurements have been converted
to one single score through TOPSIS method and firms have been ranked.
After,inthenextstep,theTOPSISrankingscoreiscomparedwiththerankingusing
traditional performance indicators. They found that TOPSIS performance scores
62 E. Ulas and B. Keskin
show variability in the term and do not match with rankings which are done using
traditional performance measurement. Chattopadhyay and Bose (2015) studied
composite indicator design to summarize in a single statistic variety of different
facets of macroeconomic performance and assessed relative performances of
countries with six different indicators which are the growth rate of real GDP, real
per capita GDP, unemployment rate, fiscal balance, rate of inflation, and current

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account balance. They first calculated the performance scores obtained from
TOPSIS method and the country rankings in each year according to those scores.
Then, rankings are summarized in terms of measures which together depict the
degree of stability or disarray in country-wise rankings over the years.
Correspondence analysis (CA) is applied for providing a graphical display of the
status of rankings elegantly which summarizes the cross-sectional variability in the
relative positions of countries. Mandic et al. (2014) proposed a multi-criteria fuzzy
model that eases financial performance where TOPSIS approach is used to rank the
banks and they used the data collected from Serbian banks between the years 2005
and 2010. Bao et al. (2010) investigated the application of the classical TOPSIS
method, for which crisp numerical values replace the linguistic assessments that
might face some practical problems because of vague judgment. They use the
TOPSIS approach proposed to make a more rational decision. Gustav (2004)
discussed that human development may be a necessary prerequisite for long-term
sustainable growth. It may exhibit threshold effects, in the sense that nations must
attain a certain HD level before future economic growth becomes sustainable.

2.3 Methodology:
Analytic hierarchy process (AHP) and TOPSIS method are applied to the selected
indicators to evaluate economic performance of nations between the years 2010
and 2014. The countries are selected from their growth rate. 20 European countries
which have the highest GDP rates are included in this study. AHP is used to
determine weights of criteria that are subsequently inserted to weighted decision
matrix in TOPSIS approach. The implementation is carried out with R statistical
software and Excel Solver.

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2.3.1 Analytic Hierarchical Process (AHP)
In this study, AHP approach is used to determine weighting of the components of
the economic performance. Table 6.1 presents possible classification of the
strength of preferences. This nine fundamental scale is introduced by Saaty and
Alexander in 1981. The calculation procedure is clearly explained by Wabalickis
(1987). Firstly, each element of the pair wise comparison matrix is divided by the
sum of the column. Then, obtained new matrix rows are summed and mean of the
rows is taken. Same process is repeated for each column and final matrix is found
as weighted matrix. This process is done for countries and indicators separately.
Then, final weighted matrix is obtained by multiplying country and indicator
matrix.

2.3.2 TOPSIS
After weights are calculated with AHP approach, TOPSIS is used to rank the
economic performances of nations. It is a distance-based approach and TOPSIS is
a method that is used for multi-attribute decision making by ranking the
alternatives according to the closest between the alternative and ideal. TOPSIS has
four assumptions (Opricovic and Tzend 2004)

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1. A quantitative value, xi, can be assigned to each criterion, Ki, representing its
importance.
2. For each Ki, a quantitative value, Vij, can be assigned to each alternative, aj,
representing the performance of aj on the basis of Ki.
3. The performance of each alternative relative to each criterion can be evaluated
on the basis of a common scale.
4. The criteria are different
and mutually
independent.

The
computational procedure
of TOPSIS method is
provided by
Mahmoodzadeh et al. (2007)
as follows:
1. An n × q matrix contains the raw consequence data for all alternatives against
all criteria.
2. Vector normalization: Each aj is assigned a quantitative value, each Ki
representing the performance of aj:
3. Assign weights to criteria:
4. Define the ideal and anti-ideal point: Set the ideal point, aþ, and anti-ideal point,
a. For a benefit criterion cj, vjðaþÞ¼max vi j and vjðaÞ = min vi j; for a cost
criterion, ck, vjðaÞ = max vi j and vjðaþÞ = min vi j.
5. Calculate the separation measures using Euclidean distance, where UðvijÞ is a
weighted value:

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6. Calculate the relative closeness to the ideal solution. The overall value, UðajÞ,
of each aj is calculated using the following:

2.3.3 Implementation and Result


The dataset is obtained directly from World Bank Web site for the period 2010–
2014. So that dataset which is used in this study is reliable. Some countries are
eliminated from the dataset due to their growth rate because first 20 countries with
the highest growth rate are included in this study. The analysis was carried out with
the statistical software R and Excel. The weights are calculated with AHP
approach.

Then, ranking is done with TOPSIS method. Five important indicators that are
affecting the economic performances are selected. The selected indicators are GDP
per capita, youth unemployment, inflation, account balance, and growth rate.
Indicators were selected based on the survey literature mentioned at the previous
section. The weights and descriptive statistics for indicators can be seen in the
Table 6.2. Table 6.3 gives the mean scores of countries for the years 2010–2014.
The analysis was carried out with these mean scores. The
first 20 countries with the highest growth rate in Europe
are included in this study. Countries included in this
paper can be seen in the table below. AHP approach is
used to determine weights for indicators. Calculated weights for each indicator
are given in Table 6.1.

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These scores are 0.2833, 0.1806, 0.2024, 0.1826, and 0.1511 for growth rate, youth
unemployment, inflation, GDP per capita, and account balance, respectively. The
mean score for “world” is added to data for the purpose of comparison. After
weights are calculated, the decision matrix is created and normalized decision
matrix is obtained from formula (6.1). Then, the normalized values are multiplied
by weights and weighted normalized decision matrix is obtained which is shown in
Table 6.3. Furthermore, positive ideal and negative ideal scores are calculated.
Maximum value in each column of matrix is selected for positive ideal set and
minimum value in each column of matrix is selected for negative ideal set.

In this study, economic performances of 20 European countries for the period


2010–2014 are analyzed. Indicators used to measure the economic performances of
those countries have been identified. Indicators that are included in these analyses
are growth rate, youth unemployment, inflation, GDP per capita, and account
balance. The weights are determined with the criteria by using AHP. Weights for
growth rate, youth unemployment, inflation, GDP per capita, and account balance
are found as 0.2833, 0.1806, 0.2024, 0.1826, and 0.1511, respectively.
Furthermore, TOPSIS is used to evaluate ranking of 20 European countries.
Highest and lowest economic performance rank is highlighted.

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3.0 HDI value and Bangladesh
Bangladesh has moved one place up in the UN Human Development Index or
HDI in 2018 to rank 135th out of 189 countries.

Placed among Medium Development countries in the 2019 Human Development


Report published last Monday, Bangladesh’s HDI was 0.614 with 72.3 years of life
expectancy at birth, 11.2 years of expected schooling and 4,057 PPP dollars GNI
per capita.
It has improved five notches since 2013.

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Bangladesh’s HDI ranking, however, is still fifth among South Asian nations,
behind Sri Lanka at 71, the Maldives at 104, India at 129, and Bhutan at 134.
Nepal has been placed at 147, Pakistan 152, and Afghanistan at 170.
Norway continued to top the HDI 2019 list, while Niger remained at the bottom.

HDI is a composite index assessing progress in three basic dimensions of human


development -- health as measured by life expectancy at birth, knowledge
measured by mean years of education, and standard of living measured by per
capita gross national income.
Movements in HDI are driven by changes in health, education and income.
At Gender Inequality Index, life expectancy at birth rate of female in Bangladesh
was 74.3 while male 70.6.
The report put expected schooling year of female at 11.6 and male at 10.8.
Estimated GNI per capita of women stood at 2,373 PPP dollars and men at 5,701
PPP dollars.
Between 1990 and 2018, Bangladesh’s HDI value increased from 0.388 to 0.614,
an increase of 58.3 percent.
Bangladesh’s life expectancy at birth increased by 14.1 years, mean years of
schooling increased by 3.2 years and expected years of schooling increased by 5.6
years.
Bangladesh’s GNI per capita increased by about 198.7 percent between 1990 and
2018.
Bangladesh’s 2018 HDI of 0.614 is below the average of 0.634 for countries in the
medium human development group and below the average of 0.642 for countries in
South Asia.

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In Bangladesh and 10 other countries — with a wide range of health systems and
incomes — governments used an incremental approach to create and expand their
universal health coverage programs, according to the report.
The process typically began by providing health insurance to civil servants and
formal sector workers. Next was expanding coverage to poor and vulnerable
people, which required a strong political commitment, the report says.

3.1 Bangladesh HDI and economy comparison in South-Asia


Bangladesh climbed up a spot to 135 among 189 countries in the 2019 human
development index, according to a report by the United Nations Development
Program (UNDP). 

It is, however, ranked lower than Sri Lanka, India and Bhutan.

Last year, Bangladesh was ranked 136.  

The steady progress was due to development, which had seen a reduction in
poverty, along with gains in life expectancy, education, and access to health care. 

Bangladesh’s HDI value for 2018 is 0.614 -- which put the country in the medium
human development category.  

Between 1990 and 2018, Bangladesh’s HDI value increased from 0.388 to 0.614, a
58.3 percent increase.  

Between 1990 and 2018, Bangladesh’s life expectancy at birth increased by 14.1
years, mean years of schooling increased by 3.2 years and expected years of
schooling increased by 5.6 years. Bangladesh’s GNI per capita increased by about
198.7 percent between the same years. 

“We have to address the challenges of inequalities. We have to be very strategic to


address them. Why inequality could not be reduced should be addressed,” Ahsan H
Mansur, executive director of the Policy Research Institute of Bangladesh, told The
Daily Star yesterday. 

He also said inequality should be reduced to reap the benefits of development. 

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The HDI measures the average achievement in three basic dimensions of human
development -- life expectancy, education and per capita income. 

Norway, Switzerland, Ireland held the top three positions in that order. Germany
placed fourth along with Hong Kong, and Australia was ranked fifth. 

Sri Lanka (71) and China (85) are higher up the rank scale, while India (130),
Bhutan (134), Myanmar (145), Nepal (147), Pakistan (152) and Afghanistan (170)
were lower on the list. 

As per the HDI, no other region had experienced such rapid human development
progress. The report said South Asia was the fastest growing region in human
development progress witnessing a 46% growth between 1990-2018, followed by
East Asia and the Pacific at 43%.  

Bangladesh’s HDI value is 0.614 but it is below the average of 0.634 for countries
in the medium human development group and below the average of 0.642 for
countries in South Asia. 

But when it comes to inequality, the situation is grim. As inequality in a country


increases, the loss in human development also increases. 

When the value is discounted for inequality, the HDI of Bangladesh falls to 0.465,
a loss of 24.3 percent due to inequality.  

In the last 28 years, the average annual HDI growth rate of Bangladesh is 1.65. But
the growth rate has slowed down compared to 1990-2000 when it was 1.95 to
2010-2018 when it stood at 1.40. 

The Gender Development Index measures gender inequalities in the achievement


of three basic dimensions of human development -- health (measured by female
and male life expectancy at birth), education (measured by female and male
expected years of schooling for children and mean years for adults aged 25 years
and older) and command over economic resources. 

The GDI is calculated for 166 countries. The 2018 female HDI value for
Bangladesh is 0.575 in contrast with 0.642 for males, resulting in a GDI value of
0.895.  

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When comes to the Gender Inequality Index (GII), Bangladesh’s value is 0.536,
ranking 129 out of 162 countries in the 2018 index.  

In the GII, India is at 122, Sri Lanka at 86, Bhutan at 99 and Myanmar at 106. 

In Bangladesh, 20.3 percent of the parliamentary seats are held by women, and
45.3 percent of adult women have reached at least a secondary level of education
compared to 49.2 percent of their male counterparts. In comparison, Nepal and
Pakistan are ranked at 115 and 136 respectively in the GII. 

Former World Bank Economist Zahid Hussain said, “The improvement in the HDI
ranking, even though just by a step, is good news. At the same time, the large
difference between HDI and the inequality-adjusted HDI is a concern. This reflects
not only income inequality but also inequality in the distribution of life expectancy
and expected years of schooling.”  

He said the distribution of health and education indicators is expected to be more


inclusive than the distribution of income. “When that is not the case, the concern is
that it would lead to a perpetuation of inequality in society. The problem may be
deeper when the quality dimension is taken into consideration.” 

4.0 Conclusion
People are the real wealth of a nation. Countries with a high Human Development,
foster their people, whereas countries with a low human development seem to treat
its people as renewable raw material. Each year since 1990 the Human
Development Report has published the Human Development Index (HDI) which
was introduced as an alternative to conventional measures of national
development. The HDI represents a broader definition of well-being and provides a
composite measure of three basic dimensions of human
development: health, education and income.

HDI has a close connection with economic condition of a country because it


contains the living condition, purchasing ability and overall standard of people.
Therefore a practical representation of relation of Gross National Product and per
capital income with people’s life is found. So, the effect of HDI on economy

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becomes clear from the discussion. In case of Bangladesh it is also applicable
because the HDI value and economic condition of the country shows that the effect
of HDI on economy is proportional, if HDI value is progressive then economy is
also progressive and if it is negative then economic development is also negative.
So from the discussion the effect of HDI on a countries economy from the
perspective of Bangladesh is properly represented and evaluated.

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