I conduct a cross-country analysis of the human development index (HDI) components, income, life expectancy, literacy and gross enrolment ratios, using Gray and Purser’s 1970-2005 quinquennial database for 111 countries.
1) A descriptive analysis uncovers a complex pattern of divergence and convergence for these components’ evolution. Development is not a smooth process but consists of a series of superposed transitions each taking off with increasing divergence and then converging.
2) Absolute divergence/convergence for the HDI components is decomposed using simultaneous growth regressions including a full set of quadratic interactions between the HDI components, and indicators of urbanization, trade, institutions, foreign direct investment and physical geography. These are implemented, first, using three stage least squares, all of the non-exogenous independent variables fully instrumented, and second, as independent regressions with errors clustered by countries, again all non-exogenous variables instrumented.
3) A set of quantile regressions is run for the HDI component levels on the same variables (just the linear terms), again fully instrumented.
Urbanization is a leading significant variable for human development indicators in both sets of estimates, stronger than trade, FDI and institutional indicators. These indicators act with ambiguous signs that may result from their distributive impacts, reducing their effectiveness.
The results indicate that improving markets will have smaller returns than complementing them with institutions that can coordinate urbanization as well as investment in human capital. Urbanization itself can provide a concrete agenda for development involving all aspects of economic, political and social life as well as human development.