Ever since Adam Smith wrote "The Wealth of Nations" in 1776, politicians and economists have debated why some countries prosper while others remain poor. Recently, the debate has become even more heated, as national leaders tackle sustainability issues. For example, last month heads of state gathered in Paris to debate carbon emissions, and challenges flew back and forth. No country wants to suffer from rising seas and other aspects of climate change, but at the same time, no country wants to place itself at a disadvantage, for example, from rising fuel costs.
To date, there has not been much of a framework for understanding how sustainability issues affect prosperity and how they create (or undermine) the competitive advantage of nations. Each country made as much of a commitment to sustainability as it thought it could afford (or as much as its political conditions allowed), and that was that.
Sustainability is hard to quantify, in part, because it is a very broad idea. It goes well beyond environmental concerns, and well beyond the challenge of climate change. A United Nations commission defined sustainable development as "meeting the needs of the present without compromising the ability of future generations to meet their own needs."
Recently a think tank and consultancy, SolAbility, took on the challenge of measuring sustainability – broadly defined – at a national level, and relating sustainability to national competitiveness. Their work led to a Global Sustainable Competitiveness Index, which ranks national economies based on sustainability criteria.
SolAbility's work highlights five major drivers of national competitiveness:
- Natural capital: the value of the natural environment and natural resources
- Social capital: the social factors that let people live fulfilling and productive lives, including health, equity, security and freedom
- Intellectual capital and innovation: the ability of a country to generate jobs and wealth through innovation sufficient to add and retain value in the globalized economy
- Resource management: how efficiently countries manage to utilize their capital
- Good governance: whether governments can maintain a framework for sustainable and broad-based wealth creation, and avoid the pitfalls of corruption and cronyism
It's ambitious to pack so many diverse considerations into one ranking. Most ranking schemes focus on just a single criterion. For example, the Gini coefficient measures inequality, and the "Index of Economic Freedom," produced by the Heritage Foundation, ranks countries based on libertarian-leaning criteria of small government.
But these five factors fit together and make intuitive sense. A country may be prosperous today, but that prosperity may be fragile. For example, a small oil-producing country in the Middle East would have high per capita income due to its oil reserves (natural capital), but if it lacks the innovation and good governance to diversity its economy, its prosperity is unsustainable: It will collapse as oil prices plunge and the world shifts to renewable energy.
All the worlds' countries have been scored by SolAbility. Extensive quantitative data was collected for each of the five factors, and then the factors were combined to get a single overall ranking.
The results might surprise you. Many countries rank high on some criteria while ranking low on others, and the U.S. is no exception. For example, the United States ranks 41 overall out of 180 – barely making it into the top quartile. We score very well in intellectual capital and governance, so-so on natural capital but poorly on social capital (113) and resource management (159). The poor scores for resource management come from our very high consumption of natural resources per capita and relative to gross domestic product.
In contrast, Iceland earns the number one position, and northern European countries round out the top 10. People don't talk about Iceland much these days, but it's worth remembering that Iceland became ground zero of the Great Recession when its banks were catastrophically over-leveraged with bad mortgage loans. But Iceland didn't bail them out; it forced them through bankruptcy, and today, Iceland has achieved an enviably low 4 percent unemployment rate. Such resilience is rare.
No rating system is perfect, and few come close. Nonetheless, it's important that we pursue a more robust understanding of how sustainability drives economic success. All too often, we treat sustainability decisions as a zero-sum game: We can have clean air, for example, but only at the cost of slower growth. Or we can have great schools, but only at the cost of higher taxes that discourage investment. Tools like the SolAbility ranking help us understand how sustainability can drive prosperity, rather than get in the way of it.
David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report January 8, 2016.