Defining Sustainable Competitiveness
With the 1987 publication of the report Our Common Future, sustainable development was defined as the “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”8 The breadth of the definition was meant to capture the several dimensions of development that go beyond the usual boundaries of economic growth in order to include both the tangible and intangible necessities of life.
The concept of sustainable competitiveness places more emphasis than the concept of sustainable development does on the importance of productivity as a driver of prosperity and long-term growth. We define sustainable competitiveness as the set of institutions, policies, and factors that make a nation productive over the longer term while ensuring social and environmental sustainability. Social sustainability, in turn, is defined as the institutions, policies, and factors that enable all members of society to experience the best possible health, participation, and security; and that maximize their potential to contribute to and benefit from the economic prosperity of the country in which they live. And we define environmental sustainability as the institutions, policies, and factors that ensure an efficient management of resources to enable prosperity for present and future generations.
Fundamental to the concept of sustainable competitiveness is the notion that, although competitiveness can be equated with productivity, sustainable competitiveness can be linked to a broader concept that focuses on aspects that go beyond mere economic outcomes to include other important elements that render societies sustainably prosperous by ensuring high-quality growth.
Another way of looking at the concept of sustainable competitiveness is that it aims to gauge not only whether a country has the potential to grow over the medium and long term, but whether the national development process is producing the kind of society in which we want to live.
Competitiveness and environmental sustainability
The concepts of competitiveness and environmental sustainability are linked at both the country and the firm level. At the country level, because Earth’s natural resources are either limited or are renewed at a specific physical rate, finding an appropriate combination of technology and the planet’s carrying capacity could prevent the limitations of resources from becoming a drag on growth. Developing sustainable practices could also, to a certain extent, fuel productivity. For example, biodiversity can be an important source of innovation.
At the firm level, the impact of environmental regulations on productivity is still controversial, especially if externalities are not taken into account. However, many companies have started to become more aware that environmental challenges such as pollution, climate change, and resource scarcity could affect them (see Box 2). First, these challenges could affect a firm’s bottom line at some point in time, for example through frequent supply chain disruptions resulting from unforeseen meteorological catastrophes (which are thought to be affected by climate change). Second, stricter environmental regulations could also impact business operations, for example when businesses must face higher prices for commodities used as inputs of production. And third, as consumers become more aware of environmental sustainability issues, companies become more concerned about reputational risks.9 Consequently, the business sector has started to take a keener interest in environmental issues than it did a couple of decades ago. This is evidenced in the increasing number of companies voluntarily reporting on their emissions,10 and in the number of financial management firms signing on to the United Nation’s Principles for Responsible Investment.11 Companies are also taking action on issues that may impact the sector in which they do business. For example, food-processing companies have put forward and supported initiatives relating to water scarcity because this scarcity may have—in some cases is already having—an impact on crops and therefore on the supply of raw materials and cost of commodities. Another example is the information technology (IT) sector, where “sustainability is fast becoming an important corporate-performance metric.”12 Information technology companies—concerned with energy costs, reputational risks, and difficulties they confront in continuing to expand their capacity—are beginning to reduce their footprint by adopting “greener data centers” that significantly reduce energy demand.
The relationship between environmental sustainability and competitiveness is multifaceted and affects an economy in different ways. Multiple channels support a positive relationship between environmentally sustainable practices and productivity gains; here we identify and describe the main ones:
- Efficient use of natural resources. The efficient use of natural resources includes both managing exhaustible raw materials and using renewable resources within their regenerative capacity in order to minimize production costs, ensure their availability for future generations, and reduce pollution. As described by the literature on public goods, welfare increases once the negative externalities generated by pollution are corrected.13 It follows that environmental sustainability can bring about a better economic outcome if it is associated with formal or informal institutions that define property rights and result in the adoption of sustainable processes over the use of scarce resources.
- Carbon reduction. Climate change is a global issue, but its impact on individual countries and companies is significant. Some sectors are more exposed than others: agriculture is the most exposed to the effects of climate change such as rise of temperature, water scarcity, and extreme weather. Although solutions for global emission reductions require international coordination, carbon-reducing business practices can have a positive effect on long-term competitiveness. In the context of rising energy demand, improving energy efficiency through management changes, investing in technology improvement, and using low-carbon energy infrastructure can produce significant savings relatively quickly.14 In addition, investments in capital expenditures for emission reduction can generate business opportunities for new sectors
Climate change is already perceived as one of the environmental challenges with the most far-reaching and most severe negative impact on human well-being, but the debate on how to address it most efficiently is still ongoing. Some studies support the position that increasing energy efficiency and introducing emissions standards are more costly to the economy as a whole than the use of carbon pricing,15 while others see carbon taxes as having more negative impact on the economy in the short run. For example, according to a study by the Congressional Budget Office of the United States,16 the impact of a carbon tax could be detrimental to output in the short run by raising the cost of energy and transport; however, this cost could be partially offset by cuts in marginal income taxation. In the longer run, a higher pricing of carbon-intensive goods would reduce emissions and thus reduce the taxation level and the initial economic drag associated with it.
One more element to take into account is the impact of externalities linked to climate change. Choosing a less carbon-intensive development path generates returns by reducing losses that result from climate change. For example, the negative impact of climate change on crops is already documented.17
There is also agreement that climate change gives rise to extreme weather, which in turn can destroy tangible assets such as infrastructure, public facilities, and industrial stocks. These weather events interrupt the regular flow of goods and services both within and between countries. According to an estimate of the 2007–2008 UN Human Development Report, to reach the Millennium Development Goals by 2015, the cost associated with coping with a more hostile climate since 2007 is approximately US$85 billion per year more than would be required to achieve these same goals if climate change did not have to be considered. To take one example, the recent floods in the Balkans are, according to scientists, probably linked to climate change.18 According to the World Health Organization,19 this event has caused the death of almost 60 people and displaced over 60,000 more. Looking at its economic impact alone, the European Bank for Reconstruction and Development reports physical damages estimated at €1.5–€2 billion in Serbia and about €1.3 billion in Bosnia and Herzegovina, particularly affecting agriculture, power generation, mining, and transport infrastructure.
- Improved health. A high-quality natural environment improves the productivity of the workforce by reducing health damage caused by pollution or environmental degradation. Since health affects productivity and pollution affects health, efforts to reduce pollution may be interpreted as an investment in human capital. Recent empirical evidence has indicated that, in the United States, ozone levels below federal air quality standards have a positive impact on productivity (a 10 parts per billion decrease in ozone concentrations raises worker productivity by 4.2 percent).20 Finally, environment-driven health problems lead to resource misallocation, forcing governments to fund additional, and otherwise unnecessary, health programs and diverting resources that would otherwise go into productivity-enhancing investments in, for example, education or innovation.
- Biodiversity for innovation. Ultimately, environmental degradation can impact the way ecosystems work and reduce biodiversity. Biodiversity supports the productivity of the workforce by providing food, fiber, shelter, and natural medicines, and it regulates the water supply and air quality. According to the Convention on Biodiversity,21 more than 1.3 billion people in the world depend on biodiversity and on basic ecosystem goods for their livelihoods. Biodiversity losses caused by deforestation or significant land use changes—which today are estimated to be 100 to 1,000 times greater than is thought to occur naturally—increase the vulnerability of terrestrial and aquatic ecosystems and induce changes in climate and ocean acidity.22 Biodiversity is also a key driver of economic growth, especially in developing countries, because it provides the basis for many innovations in areas such as pharmaceutical or cosmetic products. At the same time, interfering with ecosystems may make living conditions for humans more difficult and perhaps engender additional costs. Last but not least, biodiversity restoration and protection can create profitable business opportunities, incentivizing the development of new technologies and products for their utilization in still-unexplored markets. Furthermore, investing in the greening of tourism can reduce the cost of energy, water, and waste and thus enhance the value of biodiversity, ecosystems, and cultural heritage.23
Competitiveness and social sustainability
Interest among economists and social scientists in the relationship between income distribution and economic performance has been growing over the last 20 years. Although the findings are not yet conclusive, the diverging patterns in income of different population clusters in developing and developed economies alike are certainly tangible and explain the broad interest around this topic.
However, the concept of social sustainability goes beyond just inequality. Although there is no unique consensus around the concept of social sustainability, it is possible to identify recurring themes in the different definitions that have been proposed so far. Human rights, equity, and social justice are among the most relevant.
Since the recommendations of the Stiglitz-Sen-Fitoussi Commission in 2009,24 many attempts have been made to identify the relationship between social sustainability and development. However, empirical evidence to support the theory that the two are interdependent remains somewhat inconclusive.
More recently the concept of inclusive growth has entered international discourse. Although not yet universally defined, inclusive growth looks at how countries can achieve growth and balanced social outcomes simultaneously. Box 3 describes a related initiative on inclusive growth launched at the World Economic Forum, which attempts to respond to this challenge.
Recent events in different parts of the world have generated concerns that an unbalanced social model can undermine the stability of the growth process for both current and future generations. If economic benefits are perceived to be unevenly distributed within a society, and this inequality leads to significant social discontent, the capacity of individuals to contribute to and benefit from higher rates of economic growth can be affected.
Based on our definition of sustainable competitiveness, specified above, we analyze here those dimensions of social sustainability that are likely to fuel productivity and long-term prosperity while at the same time preserving social stability. Our aim is to unbundle the most relevant elements, even if they are often interrelated and not always clearly distinct:
- Inclusion. An inclusive society ensures that all citizens contribute to and benefit from the economic prosperity of their country. Inclusion is a prerequisite for social cohesion because, if some members of the community are marginalized, the society will lack the necessary coherence of goals to accomplish common purposes. Typical examples of social exclusion that have a considerable negative impact on the competitiveness of a nation are the lack of access to basic necessities, discrimination according to gender, youth marginalization, and extreme polarization of income. Any type of social exclusion that prevents people from fully participating in the labor market reduces the availability of talent to a country’s firms and organizations, thereby reducing competitiveness. Lack of access to sanitation, drinkable water, or healthcare can dramatically impair labor productivity, reducing the ability of the economy to compete globally. At the same time, when young people are marginalized by the labor market and have access only to short-term and highly volatile jobs, they remain vulnerable, especially during downturns. These workers usually receive less on-the-job training than their counterparts in stable positions, thus reducing the overall level of human capital. Finally, the participation and empowerment of women is key to ensuring a large talent pool and tends to bring about other positive effects, such as reducing infant mortality, reducing poverty, improving the management of scarce resources, reducing conflict, and guaranteeing food security.
- Equity and cohesion. An equitable society guarantees the same opportunities for all its members, rewarding them according to their talents and fairly redistributing the benefits of growing wealth,25 creating a cohesive society with no excessive income disparities across different groups. Inequality is a multidimensional concept. For the purposes of this Report, we are mainly interested in income inequality, which certainly represents one of the biggest challenges for policymakers globally and which is highly correlated with access to other opportunities.
Although some earlier literature found a positive relationship between growth and inequality, more recent research tends to find the opposite, via the following channels: first, high levels of inequality can potentially distort the political process;26 second, inequality can lead to reduction in human capital investments;27 third, it may require more redistributive efforts, thus potentially introducing more market distortions; fourth, in presence of weak institutions, it can lead to economically harmful social tensions; and finally, in countries defined as “wage-led,” a more equal distribution of income tends to deliver higher output.28 Persistent inequalities tend to limit upward social mobility, preventing gifted and hard-working individuals from being rewarded according to their talents. However, it can be argued that some degree of disparity—provided it is not driven by rent positions—is actually beneficial for growth because it incentivizes people to invest in education, work harder, and be more innovative and productive.
- Resilience. A social system is resilient when it can absorb temporary or permanent shocks and adapt to quickly changing conditions without compromising its stability. Formal or informal institutions usually perform the role of shock absorber, reducing the vulnerability of the society as a whole. In advanced economies, welfare states promote the economic and social well-being of the society by protecting their members from excessive loss of income during old age and during periods of unemployment or illness. Although welfare systems represent a source of stability for an economy, they can turn into a hurdle for its competitiveness since overly generous social security programs increase labor costs; can undermine the stability of public finances and limit macro-stabilization policies; and can hamper the incentives to work, innovate, and excel. In order to be sustainable, a social protection system needs to be well balanced and affordable.
The resilience of a social system also depends on the features of its labor market and on the extent of the black economy. When workers have access only to short-term contracts or vulnerable employment, they are exposed to negative shocks and to all the costs associated with unemployment. Moreover, a widespread black economy may affect the resilience of a social system, since informal workers are more vulnerable to concerns related to job loss, old age, maternity, disability, or illness.
Relationship between environmental and social sustainability
The third and final relationship we would like to explore is the one between environmental and social sustainability. The quality of the environment and the structure of a society are clearly correlated. On the one hand, well-managed natural resources increase the quality of life, reduce tensions within and between generations, provide better opportunities for the whole community, and improve the resilience of the society. Moreover, the management of natural resources might translate into “in-kind” income distribution, as resource scarcity may leave the poorest of the population unable to access basic necessities. On the other hand, widespread prosperity, which facilitates a high quality of life, requires a functioning economy that, by definition, uses natural resources. For this reason, although the academic literature tends to focus on these two dimensions individually, the World Economic Forum is interested in exploring the way environmental and social sustainability interact with one another. In this chapter, selected channels that have been extensively highlighted by the literature are presented:
- Health and environmental degradation. As discussed in the previous section, a degraded environment negatively affects the health, and thus the productivity, of the workforce. It also reduces the overall quality of life of members of the society. Each year, air pollution, unsafe drinking water, and exposure to chemical products contribute to a number of often-lethal diseases both in the developed and developing world. According to the Organisation for Economic Co-operation and Development (OECD),29 unsafe water supplies, lack of sanitation, and poor hygiene are responsible for 3 percent of all deaths worldwide, of which 90 percent are children’s. An unhealthy environment dampens economic opportunities, prevents people from participating in the life of the community, diverts resources from productive uses, and contributes to urban decline.
- Demography, poverty, and the environment. The relationship between demography and environmental/social sustainability is extremely intricate. Rapidly growing populations can be a source of environmental stress, leading to greenhouse gas emissions, high rates of soil erosion, and the extinction of species. If rapid population growth is not accompanied by environmental management, it can give rise to tensions between groups for the control of scarce resources and can therefore be a source of further social instability, creating a vicious circle. Persistent poverty may also affect the environment and may lead to massive unplanned urbanization, such as slums, where large segments of the population are without access to basic services. Such settlements can have significant repercussions for the environment, including deforestation and the pollution of water resources, which results from the lack of waste management.
- Energy and social stability. Increases in energy prices disproportionately affect the real purchasing power of the lowest earners in the society, because the elasticity of energy demand (fuel and electricity) is relatively rigid in the short run. Rising energy prices can therefore exacerbate income polarization. In societies where the purchasing power of significant segments of the population is low, high energy prices can endanger the affordability of basic services unless the loss of purchasing power is offset by fiscal policies.
An additional link between energy, environment, and social sustainability is the use of particular alternative energy sources such as ethanol and biodiesel. Although these types of energy sources help to reduce CO2 emissions, they also use wide land areas and contribute to increased food prices. Moreover, these alternatives also have significant environmental impact in the form of additional pressure on water resources. Hence, the assessment of energy policies needs to be based on a holistic view that takes into consideration a broad spectrum of environmental and social consequences.
- Climate change, food security, and conflict.30 In the future, rising sea levels and more extreme weather conditions may force millions of people to migrate, adding pressure to natural resources—especially water—in the destination areas. Rising competition over these resources could eventually result in military conflict. Adverse changes in temperature and precipitation have started to affect the capacity of many areas to produce food, thus increasing the vulnerability of the population. According to some studies, at present 1.7 billion people live in water-stressed countries. Industrialization and demographic forces are likely to further aggravate the situation, and climate change may exacerbate the situation even more by decreasing stream-flow and groundwater recharge.
Pressure on water resources and land, combined with a growing world population and rising poverty in some regions, may also aggravate migration and food security concerns, which already represent major problems today.31 At present, the Food and Agriculture Organization of the United Nations estimates that approximately 850 million people globally (or 12 percent of the world’s population) are without sufficient access to food or are malnourished; these people are concentrated mostly in the developing world.32 In less-developed countries, decreasing crop yields may lead to further exploiting degraded land, while globally, changing environmental conditions are reducing crop productivity. This constellation of pressures may increase food insecurity in the long term, even in areas where food availability is relatively secure today, which in turn may lead to exacerbate poverty and migration phenomena.
- Climate change and women’s empowerment.33 According to a growing body of research, climate change is not gender neutral. In many rural and traditional societies in Africa, women are responsible for securing water, food, and energy for cooking and heating. But the effects of climate change such as droughts, heat waves, infections encouraged by rising temperatures, deforestation, and uncertain rainfall make it harder for these women to secure the resources they need. This, in turn, further weakens their position in society and reduces opportunities to better their lives and that of their families.