Harmonic Development Index : a novel approach to measure environmental, social, and economic development

Abstract

Gross domestic product (GDP) is the most commonly used approach to measure a country's economic performance. The shortcomings of GDP in capturing overall well-being, economic development and sustainable growth are among the most debated issues in economic research. This study aimed to develop a method that captures broader aspects of socio-economic prosperity. We compiled a panel dataset of yearly measurements with 32 social and economic indicators from 87 countries between 2005 and 2019 from publicly available sources. Linear interpolation, extrapolation, and random forest imputation methods were used to substitute missing values. Logarithmic transformation of some selected variables, followed by the standardisation of all variables, was applied to ease the usability and comparability of the variables. Exploratory factor analysis with maximum likelihood estimation was used to construct six domain- specific subindices, or domains in general (variance explained by factors 0.05). Three domains showed two dominant factors each (cumulative variance explained by the factors 50%, p < 0.05). One domain had a single dominant factor that did not reach the variance explained cut-off value (36.8%), although the second factor was not significant (p = 0.554); therefore, the first factor was considered the only dominant factor. We found that domains including variables related to the real economy (25.7%) and social equality and sustainability (19.0%) had the highest weights in the composite indicator. This study developed a novel method to capture important aspects of social and economic prosperity in 87 countries. The harmonic development index allows intercountry and intertemporal comparisons across six domains related to economic development, work- and knowledge-based society, and financial, environmental, social, and demographic sustainability. The composite indicator serves as a tool to rank countries and track changes in the rankings, providing useful information for policymakers and researchers.