For the last three years, the World Economic Forum has been working on better analysing and measuring how sustainability relates to national competitiveness.
Indeed, since the Global Competitiveness Report 2011-2012, the Forum has complemented the Global Competitiveness Index (GCI) with two pillars — social and environmental sustainability. The goal of this Sustainability-Adjusted GCI is to provide a sustainability-adjusted measure of “competitiveness,” a term we define as the set of institutions, policies, and factors that determine the level of productivity of a country.
The two pillars include indicators that are important for sustainability, but their impact on productivity or economic growth has not been studied as in-depth as those included in the GCI (mostly for lack of data — an issue that we have raised frequently).
The social sustainability pillar is made up of nine indicators related to access to basic necessities (access to sanitation, improved drinking water, healthcare), vulnerability to economic exclusion (vulnerable employment, extent of informal economy, social safety net protection) and social cohesion (income Gini Index, social mobility, youth unemployment). The environmental sustainability pillar is made of 10 indicators related to environmental policy (environmental regulations, number of ratified treaties, terrestrial biome protection), use of renewable resources (baseline water stress, wastewater treatment, forest cover change, overexploitation of fish stocks) and degradation of the environment (level of particulate matter concentration, CO2 intensity, quality of the natural environment).
In order to calculate the Sustainability-Adjusted GCI, and in absence of clear theoretical guidance on assigning weights to the individual elements, each indicator has been given an equal weight within each pillar. Each pillar is converted into an “adjustment coefficient” with a range of 0.8 to 1.2, which is then used to adjust the GCI score upward or downward. Consequently, the score of the Sustainability-Adjusted GCI ranges between a maximum of 20 percent below and 20 percent above the underlying GCI score. The individual 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.
The results of this exercise are very insightful. Irrespective of their level of competitiveness, countries can do better or worse on the two elements of sustainability in terms of their competitiveness. However, we have observed 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 — not surprisingly — is highly correlated with level of development. Developed economies tend to have more mature institutions to ensure that citizens have access to basic infrastructure, healthcare and social protection. 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. 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.
The U.S. provides a good example of the complex relationship between competitiveness and sustainability. Ranked 3rd among countries on the GCI, U.S. competitiveness gets a positive boost from social sustainability, but that partially offset by an adjustment downward in environmental sustainability due to air pollution, depleting fish stocks and a low commitment to joining international treaties.
Likewise, 28th-ranked China gets a slightly better rating on social sustainability thanks to improved access to drinking water and sanitation — though inequality is still quite high and China does not disclose figures on youth and vulnerable employment. On the environmental side, meanwhile, issues such as water and air pollution result in a lower Sustainability-Adjusted GCI.
Yet top-ranked Switzerland demonstrates that trade-offs between being sustainable and being competitive are not necessary. Its leading position is reinforced by social and environmental protections.
Overall, for us, the important lesson from this exercise is that it seems that there are no trade-offs between being sustainable and competitiveness — quite the contrary. This should be an encouraging message for policy-makers when considering more sustainable policies.
Top image: Zurich, courtesy of RudyBalasko
Roberto Crotti is a Quantitative Economist, Global Competitiveness and Risk at the World Economic Forum.
Cecilia Serin is a Senior Associate, Global Competitiveness Network at the World Economic Forum.