The Measurement of Sustainable Competitiveness
In order to assess where we stand today and to provide meaningful insights about how best to address the complex and highly interdependent challenges related to sustainable competitiveness, it is helpful to structure the analysis through a conceptual framework and to be able to measure the concept.
Efforts to measure sustainability
The following sections lay out the key existing approaches to measuring sustainability and describe the methodology of the sustainability-adjusted Global Competitiveness Index, which is the World Economic Forum’s ongoing contribution to these efforts.
At the country level, the main references in this domain remain, as highlighted in previous editions of this Report, the recommendations of the Stiglitz-Sen-Fitoussi Commission; the European Commission’s sustainability objectives presented in the Europe 2020 growth strategy; the OECD’s Better Life Index; and the United Nations Development Programme’s (UNDP) Human Development Index (HDI), which has included the environmental sustainability and equity adjustments.34 The United Nations, subsequent to the first Millennium Development Goals, is discussing a wider set of indicators to track progress in sustainability with the new Sustainable Development Goals (see Box 4).
Other efforts to measure specific aspects of social sustainability include the World Bank’s Worldwide Governance Indicators Framework and the International Labour Organization’s Decent Work initiative.35 For the metrics of environmental sustainability, the main contributions remain the Environmental Performance Index (EPI) developed by researchers at Yale and Columbia universities; 36 the Ecological Footprint, developed by the Global Footprint Network;37 and the Global Adaptation Index.38
Another source of sustainability measures comes from companies’ reporting standards such as the triple bottom line accounting, as a growing body of firms and public institutions systematically reveal information about their environmental and social performance beyond the traditional financial statement.
Despite this progress, a generalized lack of high-quality, internationally comparable data that would allow countries to fully understand how they fare in these critical areas and benchmark themselves against peers persists. Without an improvement in the quality and availability of key data on social and environmental sustainability, countries will continue to face challenges when assessing and monitoring key dimensions of their situation. The lack of data also renders far-reaching quantitative analysis of the topic impossible and makes it difficult to identify channels of influence and assign relative importance to the different aspects of sustainable competitiveness. Better data would enable countries to make better decisions in their attempt to identify and implement appropriate policies and measures to ensure that their development model leads to the desired outcomes. The lack of data is a challenge that is shared by all the frameworks described above as well as by our sustainable competitiveness assessment, detailed in the next section.
Sustainable competitiveness: The analytical framework
Based on our definition of sustainable competitiveness, we have developed a framework that aims to create a common ground to develop policies that balance economic prosperity with social inclusion and environmental stewardship. This conceptual model is represented in Figure 1, which presents a framework where the Forum’s index for measuring competitiveness, the Global Competitiveness Index (GCI), is adjusted by factors that encompass social and environmental sustainability. This framework highlights the central position of competitiveness as the key driver of prosperity in society, recognizing that high levels of competitiveness are crucial to sustained prosperity.
Figure 1: The structure of the sustainability-adjusted GCI
Note: Refer to appendix A for a detail explanation of the methodology.
The GCI measures the level of competitiveness of an economy, as discussed in Chapter 1.1, which is defined as the set of institutions, policies, and factors that determine the level of productivity of an economy. The GCI is a comprehensive index that takes into account 12 pillars or drivers: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation. The variables that are analyzed in each of these 12 pillars are well known and benefit from more than 30 years of ongoing work on competitiveness at the World Economic Forum as well as a rich literature on growth and development.
However, the framework presented in Figure 1 indicates that competitiveness on its own may not lead to sustainable levels of prosperity. Although the attainment of a certain level of economic prosperity is essential for achieving high standards of living, within this exercise, countries are assessed also for their ability to generate this long-lasting prosperity for their citizens in a sustainable way. In other words, competitiveness is a necessary but not sufficient condition for continued prosperity—hence the need for the additional social sustainability–adjusted and environmental sustainability–adjusted measures of competitiveness.
As described in the first half of this chapter, defining the functional relationship between competitiveness and sustainability and identifying and measuring the pillars and variables that are driving environmental and social sustainability are complex tasks from both a conceptual and a measurement point of view. Sufficient evidence does not yet exist that would allow us to identify a solid functional relationship among them; we therefore opt for the simple approach of defining a linear relationship among the three dimensions. As a result, the final overall sustainability-adjusted Global Competitiveness Index is an average of the two sustainability-adjusted indexes: the social sustainability–adjusted GCI and the environmental sustainability–adjusted GCI.39
Social sustainability pillar
For social sustainability, the Forum identifies three conceptual elements (Figure 2). The first category aims to assess a population’s access to basic necessities.40 It includes three indicators: Access to sanitation, Access to improved drinking water, and Access to healthcare services. This category is thus a measure of inclusion as well as a measure of the fulfillment of basic physical needs. Other indicators that we would have liked to incorporate but could not because of the lack of data include access to decent housing and food security. A population with poor access to water, food, shelter, healthcare, and sanitation cannot develop to its full capacity.
The second category is linked to the concept of perceived economic security. Hence it aims to evaluate a population’s vulnerability to economic exclusion. Three indicators have been chosen for this evaluation: Vulnerable employment as a percentage of total employment, the Extent of the informal economy, and Social safety net protection. The vulnerable employment indicator measures the percentage of people who are self-employed in a small business or are in a small family business that may provide income levels insufficient to meet the living standards of the country of residence and can prove unstable in times of economic difficulties. The extent of the informal economy provides a sense of how well integrated the workforce is into official structures. A workforce that is less integrated leaves workers more vulnerable to concerns related to job loss, old age, maternity, disability, or illness. The social safety net is a complementary measure of protection: in times of financial and economic instability, the safety net helps households to maintain their access to basic necessities and to weather crises without falling into poverty traps. Providing protection also leads to a sense of financial security that enables individuals to undertake investments and entrepreneurial risk, which can in turn translate into the creation of new jobs and innovative ideas, thus benefitting the economy.
A third category can be thought of as an assessment of social cohesion and includes the following indicators: the Income Gini index, Social mobility, and Youth unemployment. The income Gini index is a measure of income inequality, but keep in mind that—from a normative approach—excessive inequality may hide relative poverty that would prevent lower-income families from accessing the same opportunities as those with incomes at the high end of the range in the society.
Linked to this idea, we include an indicator on social mobility. In the context of sustainable competitiveness, it is crucial that subsequent generations can improve their condition regardless of the socioeconomic status of their parents. From a purely economic perspective, the absence of such social mobility can be detrimental to human capital development because talented individuals, in a society that does not allow them to access education or to move ahead, will not be leveraged for economic advancement and they may leave their home country to pursue opportunities abroad. Additionally, low expectations for the future in a context of high unemployment and persistent inequality can spark political instability. On a broader conceptual level, social mobility is also a direct measure of the freedom to pursue human development.
Finally, high youth unemployment can reduce social cohesion and incur significant economic and social costs. It depresses lifetime earnings for unemployed workers, taking a toll on their health and reducing the potential of the next generation to succeed. From an economic standpoint, high youth unemployment reflects a failure to mobilize existing resources and build productive skills.
Environmental sustainability pillar
To develop the environmental sustainability pillar, the Forum has continued to work closely with experts at Yale’s Center for Environmental Law and Policy (YCELP), with the Center for International Earth Science Information Network (CIESIN) at Columbia University’s Earth Institute, and with the World Resource Institute (WRI) to define the best existing indicators in this area and to understand the strengths and limitations of these data.
More generally, the measures captured here and presented in the environmental sustainability pillar are meant to complement the analysis carried out through the Environmental Performance Index (EPI), which provides a much more comprehensive indication of national performance on a variety of environmental indicators. In this pillar, indicators have been selected according to three categories (see Figure 3) aimed at covering the most relevant aspects of environmental sustainability.
The first area measured in the environmental sustainability pillar is environmental policy, which is composed of a gauge of the stringency and enforcement of Environmental regulations along with the extent to which land areas are protected (biome protection), providing an assessment of a country’s commitment to protecting natural capital. We also include a measure of the number of key International environmental treaties, out of a total of 25, in which the country is a participant. This indicator demonstrates the country’s level of engagement with environmental issues and thus its willingness to become involved in international efforts toward addressing global environmental challenges. Together these variables capture to some extent the political will of countries to respond to environmental issues in a structured and consistent way and indicate their importance in the government agenda.
The second area relates to the use of renewable resources. These indicators comprise measures of Baseline water stress in an economy, which models the relation between water supply availability and demand in each country; Wastewater treatment, which gauges what percentage of (mainly urban) wastewater is treated before it is released into the ecosystem; Forest cover change, which takes into account reported information about the percentage of total land area that is deforested (or afforested) over time; and the overexploitation of Fish stocks. A diminishing regeneration capacity is one of the major environmental issues for which a simple solution is not easily identified. Although the data in this area are among the most difficult to collect and interpret, it is crucial for a country to manage these resources in order to ensure that they remain available for future generations.
The third area takes into consideration the degradation of the environment, which can cause serious damage to human health while destroying the ecosystem. The specific indicators used to measure this concept are the Level of particulate matter concentration, CO2 intensity, and the Quality of the natural environment. Particulate matter concentration is a proxy for air pollution, which has proven negative effects on human health and is monitored by local authorities in many countries. The quality of the natural environment is a perception-based assessment of the local status of the environment that measures the observation of local business leaders on the ground. CO2 intensity is a measure of the efficiency of energy use in relation to the emissions it produces.
It is important to note that, although CO2 intensity also provides a sense of national contributions to climate change, the decision was taken again this year not to include climate change as a specific factor in this pillar. This is because there is currently no agreement on how to attribute emission responsibilities to particular countries. For example, in a world of globalized markets, should emissions be allocated to the country producing the goods that created the emissions or to the consuming country? Also it is not yet clear what impact countries’ contributions to climate change would have on national competitiveness, particularly in the absence of an international agreement that would impose costs on large emitters.
While the variables described in this and the previous sections capture a number of important aspects of social and environmental sustainability, additional variables are needed to obtain a more complete measure of the concept. These indicators include measurements of social participation and respect for core human rights, as well as discrimination and the treatment of minority populations and additional environmental indicators. However, because of the lack of quality indicators in these areas, we are unable to include them for the time being.
Updates to the environmental sustainability pillar
As a result of collaboration with our partners and our research, we were able to improve the methodology this year by updating a number of indicators because data became available or because improved measurement methodologies were provided. The indicator Baseline water stress replaces Agricultural water intensity. The methodology for the calculation of the indicators Forest cover change, Particulate matter (2.5) concentration, and Fish stocks overexploited has been updated to bring these indicators in line with the results of the Environmental Performance Index. Finally, the new indicator Wastewater treatment was added to the framework.
Calculation of the sustainability-adjusted GCI
The two areas of sustainability—social and environmental—are treated as independent adjustments to each country’s performance in the GCI.
The details behind the aggregation are described in Appendix A; Appendix B provides detailed notes and sources for each indicator. The aggregation leads to three outcomes: an environmental sustainability–adjusted GCI, a social sustainability–adjusted GCI, and an overall sustainability-adjusted GCI that combines the two effects. Lacking clear theoretical guidelines in assigning weights to the individual elements, each indicator has been given an equal weight within each pillar.
As described in detail in Appendix A, each pillar is converted into an “adjustment coefficient” with a range of 0.8 to 1.2; this coefficient is then used to adjust the GCI score upward or downward. Consequently, the sustainability-adjusted GCI score ranges between a maximum of 20 percent lower or 20 percent higher than the underlying GCI score.
The single indicators are aggregated using a simple average. Although this aggregation method is transparent and simple to replicate, its limitation is that it allows for compensation across the different sustainability dimensions. For example, a country may achieve a strong performance in terms of carbon intensity but a poor performance on deforestation. In this case, the two scores will be averaged out and the overall score may mask an uneven performance across different dimensions. This needs to be kept in mind when interpreting the results. Notwithstanding extensive research efforts, again this year we were not able to identify new metrics of appropriate quality to be included in the index.
In the Sustainable Competitiveness exercise, country coverage is again driven by data availability: we are able to cover 113 economies this year, a subset of the 144 economies covered in the 2014–2015 GCI.
Results of the sustainability-adjusted GCI analysis
This section presents the results of the sustainability-adjusted GCI. Table 1 shows how the GCI score is adjusted once sustainability indicators are taken into account. An upward arrow shows that sustainability results drive a better score than the GCI itself; a downward arrow points to a situation of vulnerability in terms of social and/or environmental sustainability that lowers the GCI score. A horizontal arrow indicates that GCI results do not change substantially when considering sustainability aspects. The results indicate that there is no clear trade-off between being competitive and being sustainable.
Table 1: Adjustment to the GCI scores by sustainability indicators
* This is the GCI rank, as presented in Chapter 1.1. Only the 113 economies covered by this exercise are included in the table. † This is the score obtained by multiplying the GCI score by the social sustainability coefficient. ‡ This is the score obtained by multiplying the GCI score by the environmental sustainability coefficient. ‡‡ This is the average of social sustainability–adjusted GCI and environmental sustainability–adjusted GCI scores. Please refer to the technical appendix of this chapter for a description of how the coefficients are calculated. All the underlying indicators are available at http://www.weforum.org/content/pages/sustainable-competitiveness. Key ⇑ GCI score changes by > +15% to +20% ⇗ GCI score changes by > +5% to +15% ⇒ GCI score remains stable between +5% and –5% ⇘ GCI score changes by < –5% to –15% ⇓ GCI score changes by < –15% to –20%
As noted in previous editions, the findings show that, irrespective of their level of competitiveness, on the two elements of sustainability countries can attain results that are above or below their competitiveness score. However, we observe that countries in the top half of the competitiveness rankings tend to perform better on sustainability as well. This is particularly true for the social sustainability dimension, which is, not surprisingly, highly correlated with level of development. Developed economies tend to have more mature institutions that ensure that citizens have access to basic infrastructure, healthcare, and welfare. At the same time, countries that face challenges related to their competitiveness fare even more poorly in terms of social sustainability.
In terms of environmental sustainability, the picture is more complex. Countries toward the lower end of the competitiveness scale tend to fare better than advanced economies in terms of emissions such as CO2, as well as in manufacturing-related pollution such as waste and by-products of industrial processes.41 However, these economies are currently facing problems that advanced economies have already experienced in their own earlier stages of development, such as biodiversity loss caused by deforestation, urbanization, and the expansion of agricultural land as well as air pollution (proxied here by particulate matter, or PM2.5, emissions) triggered by the use of older combustion technologies, especially in the transport sector.