Introducing the BCG Sustainable Economic Development Assessment

Introducing the BCG Sustainable Economic Development Assessment

          
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Introducing the BCG Sustainable Economic Development Assessment

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    SEDA: Our Methodology
    We started with the premise that the purpose of economic development in any country is to improve the overall standard of living—the well-being—of the nation’s population. Our definition of development is therefore fairly broad based—and represents a balanced view of economic and noneconomic dimensions that together constitute well-being.
    The Ten Dimensions of Social and Economic Development

    The key factors behind the well-being of a nation’s population revolve around ten dimensions. These dimensions are the organizing principle for SEDA and reflect its goal of developing a broad measure of socioeconomic development; they also provide the basis for disaggregated analysis. The ten dimensions are income, employment, income equality, economic stability, health, education, governance, the environment, infrastructure, and civil society. (See Exhibit 1.) Both in selecting the factors and in gathering data, we drew from related work done by many institutions and individuals, as well as from the expertise and experience of our colleagues in BCG’s many practice areas and its economic development topic area.

    exhibit

    The first four dimensions are measures of economic well-being. Our approach is comprehensive and therefore focuses both on income-related factors and on factors that go beyond income:

    • Income is important because it measures the ability of a nation’s population to purchase necessities as well as discretionary goods and services.

    • Level of employment is another obvious signal of a nation’s economic strength. Having a job in itself influences a person’s sense of well-being and ability to generate income. High levels of unemployment, conversely, act as a drag on development.

    • Income equality is a key dimension because it tells us how widely economic gains and opportunities are spread across the entire population and therefore how likely they are to lead to broad gains in living standards.

    • Economic stability, which includes such factors as inflation and the volatility of GDP growth rates, provides a sense of how secure economic gains are from one year to the next or, conversely, how exposed a country is to cyclical and other disruptions.

    Economic strength alone does not determine the quality of a country’s standard of living, however, so we include six additional dimensions:

    • The health of the population includes factors such as mortality and morbidity rates and access to medical care; health is critical because it has a large impact on educational participation and on productivity. Health is also a major driver of a person’s sense of well-being.

    • The quality of education and access to schooling are among the most important values of a modern society. Education enriches quality of life, influences income, and is highly valued by citizens.

    • Governance includes factors such as low levels of corruption, the rule of law, political stability, civil freedoms, and property rights. Corruption corrodes trust in public institutions and their commitment to the best interests of society. Public accountability increases the likelihood that government will provide needed services. Freedom of expression enhances well-being by allowing citizens to participate in the political process. Property rights can increase an individual’s sense of security and provide an incentive to invest for the future.

    • Environmental stewardship helps ensure that citizens have access to clean water and are not subject to unhealthy pollution levels or the adverse climate effects caused by unchecked carbon emissions. In addition, the preservation of plants and animals and their habitats is increasingly recognized as an important objective.

    • Infrastructure such as transportation, communications, and power facilities enhances quality of life in many ways. It enables people to easily communicate with one another and the outside world, travel quickly and reliably, and enjoy the modern conveniences of electricity, clean water in the home, and sanitation services. Good infrastructure also reduces transaction costs for individuals and for the economy as a whole.

    • Civil society is important because it enables citizens to become involved in shaping public policies that affect their lives. Civil society includes factors such as civic activism, public trust, intergroup cohesion, and gender equality. High levels of trust instill the confidence needed to start businesses and make people feel safe and secure. Strong intergroup cohesion encourages diverse groups to cooperate, while weak cohesion can lead to violence and reduced safety. Gender equality directly affects the well-being of women and their access to opportunities such as education.

    Having identified the factors behind the well-being of a population, we then selected the indicators by which to measure them. To be selected, an indicator had to be publicly available and updated annually. It also had to cover a very large set of countries and come from a well-recognized source. We used a number of indicators from the World Bank and the International Monetary Fund to measure material wealth, employment, and economic stability. We used indicators from the United Nations, among others, to measure education and health. The World Economic Forum’s Global Competitiveness Reports were the source of a number of indicators used to measure governance and infrastructure.

    There were some additional factors that we would have liked to include, but a lack of reliable data sources precluded us from doing so. For the factors we did include, we often had to adjust for and overcome gaps in data. We opted for comprehensiveness but also recognize the limitations: data cannot keep up with rapidly unfolding events in the world. For example, much of the data were gathered before the Arab Spring profoundly affected the current state and future of several countries.

    Assessing Development Along Three Time Horizons

    To help governments formulate strategy, it is not enough to produce a snapshot type of analysis—even when it can be updated regularly. SEDA looks at three time horizons. (See Exhibit 2.)

    exhibit
    • The current level of socioeconomic development is a static measure of well-being that shows how well a country is performing on all ten dimensions of development based on the most recent available data. Of course, this reflects the cumulative effect of past policies, national priorities, investments, and events.

    • Recent progress is a measure of how much a country has achieved over the most recent five-year period for which data are available. Here we compared the scores of the ten dimensions of development both individually and in the aggregate for 2006 and 2011 (or in the most recent five-year period for which data were available). There are limitations to measuring progress on the basis of two-point estimates. But we chose this approach for our first version of SEDA because five-year horizons, while arbitrary, are useful in statistical analysis and policy development. Future iterations may include alternatives to these reference years.

    • Long-term sustainability involved the construction of a new measure using some indicators different from those used for the two other time horizons. These indicators were drawn from a review of extensive research in the development field, as well as from BCG’s experience working with governments worldwide on economic development. The aim was to identify the enablers that help foster or sustain gains over the long term on each of the ten dimensions of development measured in the current-level assessment. The resulting long-term sustainability score is meant to be indicative of a country’s ability to start improvements or to sustain them through the next generation.

    We grouped these indicators into the following ten key sustainability factors roughly organized around the functional responsibilities of the ministries and departments through which many governments address their people’s economic and social needs: education and skills development, health care, investment capacity, public finances, economic institutions, infrastructure development, economic dynamism, social development, demographics and employment, and macroeconomic management. (See the sidebar below.)

    Key Sustainability Factors

    Education and skills development have the broadest impact on long-term social and economic development. Access to education from primary school through university, as well as high graduation rates, have pervasive effects and a strong impact on many of the ten dimensions, including income equality, health, governance, and social cohesion. High education levels are especially important for economies making the transition from labor-intensive to high-value, knowledge-intensive industries.

    The quality of health care is one of the most important drivers of higher living standards in poor nations, and as populations age, it is a factor that increasingly distinguishes quality of life in high-income economies. Health care’s impact is reflected in long-term improvements in income, income equality, education, and social cohesion.

    Investment capacity gauges the ability of an economy to invest in its future. It includes per capita income, the depth of capital markets, the ability to attract foreign investment, existing capital stock, and natural resources. High income levels put nations in an advantaged position to make the investments needed for future progress. The ability to mobilize capital enables a country to build infrastructure and productive capacity. Natural resources, meanwhile, generate funds that can be used to advance development if they are invested wisely.

    Public finances are critical to development because public-sector investment helps fund infrastructure and health and education services that markets cannot efficiently or effectively provide. High levels of public debt, on the other hand, limit a government’s spending capacity.

    Efficient, transparent, and responsive economic institutions, such as a legal system that protects property rights, the political system, and a free press, are key differentiators among nations at all development levels. They are important to all ten dimensions of social and economic development.

    Infrastructure development is a vital enabler because modern and efficient transportation systems, telecommunications networks, and electrical power grids facilitate everything from globally competitive manufacturing industries to high-quality health care and education.

    Economic dynamism concerns free trade, the ease of doing business, and whether the country’s institutional context favors entrepreneurship and innovation. It also addresses economic diversity—the presence of a wide range of economic sectors—which sustains development by reducing the volatility that frequently destabilizes nations that rely on only a few industries.

    Social development reflects the degree to which citizens participate in public policy and have trust in public safety. It is an important enabler of governance and income equality, among other dimensions of socioeconomic development. Divided societies place severe political constraints on attempts to implement policy reform.

    Demographics and employment includes employment levels, measures of income equality, and the makeup of the population. High levels of employment enable families to consume, accumulate capital, have good health care, and enjoy a high standard of living. Joblessness, by contrast, affects social stability and contributes to crime, violence, and a breakdown of family life. Demographics heavily influences the future size of the labor force, income growth, demand, and a nation’s ability to pay for social services.

    Macroeconomic management promotes stability and is important for sustaining development over the long term because high inflation and economic volatility make it difficult for companies to set prices and invest for the future.

    Together, current level of development, recent progress, and long-term sustainability provide complementary perspectives more valuable than any one of these measures taken in isolation. But the 150 countries included in this first SEDA reflect a wide range of income and wealth—both of which inevitably affect the well-being of these nations’ populations. Therefore, it is important also to understand relative performance—the strengths and weaknesses of a country’s development—by taking into account current income levels as well as growth rates. This allows for a more meaningful, peer-to-peer perspective across countries.

    The Wealth and Growth to Well-being Coefficients

    At the core of SEDA is an exploration of the relationship between wealth and well-being. On the basis of our measures of current level of development and recent progress, we can analyze a country’s relative performance using two measures:

    • The wealth to well-being coefficient compares a country’s current-level SEDA score with the score that would be expected given its per capita GDP and given the average worldwide relationship between current-level score and per capita GDP, as measured in terms of purchasing power parity. This coefficient thus provides a relative indicator of how well a country has converted its wealth into the well-being of its population. (See Exhibit 3.)

    • The growth to well-being coefficient compares a country’s recent-progress SEDA score over the most recent five years for which data are available with the score that would be expected given its per capita GDP growth rate and given the average worldwide relationship between recent-progress score and per capita GDP growth rate during the same period. This coefficient therefore shows how well a country has translated income growth into improved well-being.

    exhibit

    A wealth to well-being coefficient of 1 indicates that a country has performed in line with the worldwide average in translating its wealth into the well-being of its population. A coefficient greater than 1 indicates that a nation’s living standard is higher than what would be expected given its per capita GDP. A coefficient of less than 1 indicates that its living standard is below what would be expected given its per capita GDP.

    Likewise, a growth to well-being coefficient greater than 1 indicates that a country has improved the well-being of its population more than would be expected given its GDP growth rate, and a coefficient of less than 1 means that it has failed to improve well-being to the extent expected given its GDP growth rate.

    The same analysis can be performed for any of the individual dimensions of social and economic development. (See the case studies in “Tying It Together: Identifying Development Opportunities.”) Such an analysis can provide a valuable perspective on how well a country is converting its income or income growth into specific aspects of its population’s well-being.

    It is important to note that SEDA does not attempt to generate an absolute measure of well-being. Rather, it provides relative measures, in line with our objective of providing peer comparisons for government leaders. (See the Appendix for a more detailed explanation of our methodology.)