Social equality and governance
When assessing the sustainability of countries, we should also question the traditional growth valuation models of states. The evolutions we have seen in the past few years have reinforced the relevance of this approach.
Questioning traditional macro-economic indicators
First of all, we should look into how we assess the productivity of countries – often in a downward trend – while employment is increasingly geared towards personal services which are less ‘productive’ (in the strict sense of the word) than industrial employment, which has decreased in the past few years.
Furthermore, in terms of employment, we can ask ourselves whether unemployment is still a relevant indicator to gauge the underemployment in a country. Nowadays, unemployment rates have fallen in most member states, assuming full employment. For instance in Germany, it is at all-time lows. However, the 2008 crisis has resulted in the unemployed not systematically ending up in current unemployment statistics. However, they make come back on the labour market and join the labour force. In addition, there has not been a significant acceleration of wages in general. This implies that the labour market is not at full capacity yet. Hence, it would not be correct to state that the labour market is at full employment.
Enhancing the indicators
it explains why our sustainability model has replaced the criterion on the unemployment rate by two qualitative criteria looking into a country’s structural unemployment : long-term employment (longer than 12 months) as well as youth unemployment (in terms of the labour force of the same age) which may hamper social stability.
When looking at some countries whose unemployment rate is low nowadays, we see that the picture looks quite different when we assess these two indicators simultaneously.
Source : DPAM.
For instance, for several countries including the Netherlands and Germany, we see that unemployment is low, while long-term unemployment (longer than 1 year) is higher than average.
Social equality and governance
This qualitative analysis of unemployment is related to the issue of social inequality. The concept of the ‘working poor’ emerged after the 2008 crisis, which has resulted in an increase of non-traditional types of labour which have contributed to the rise in the number of working poor. In order to combat this, states and public authorities also have a responsibility to fulfil, in particular by taking direct measures such as wage increases, minimum wages or social transfers.
Since the inception of our model in 2007, the issue of inequality has been at the core of our reflections:
- First of all, the GINI coefficient, which looks into revenue equality within a country. While this indicator may not be perfect, it does remain an important indicator of inequality within a population. As professor Decoster of the KU Leuven mentioned in his talk to the steering group, this indicator should be completed by other factors allowing to assess the various aspects of revenue inequality, in particular the share of total revenue earned by the 20% highest earners with the total earned by the lowest earners.
- Furthermore, the importance of people living below the poverty threshold. Also in this respect, the data are very relevant and are not specific to emerging markets. On the contrary, the gap which is widening within the OECD member states is a mounting issue, and plays a very important role in the stability of structures and institutions.
- Finally, we should also pay attention to a shift in poverty which is increasingly impacting young people. This creates an intergenerational clash of powers. This is also reflected in the governance of a country. The first political choice of youngsters is generally abstention. Electoral campaigns often target the age brackets with the highest potential. Looking at the evolution of government expenditure in terms of age brackets is very revealing in this aspect. Overall, public expenditure is essentially focused on the two outliers, namely youngsters (5 to 20 years) and over 60 year olds. In the past 20 years, many countries like France have kept the highest level of expenditure of youngsters unchanged, while the highest level of over 60 year olds has increased substantially, which is primarily due to rising healthcare costs and pensions. The evolution of the old age dependency ratio is also a key element to take into account and is closely related to the governance institutions of a country.
How to understand a country’s governance
Hence, understanding a country’s governance model is a complex issue, as the duration of a government mandate is relatively short overall. Hence, we should look beyond the government or political party(ies).
Governance takes many forms, such as the respect for fundamental liberties and rights, the equality of opportunities, the quality of the governance institutions or the security of a country. It is reflected directly by the socio-economic results and may be the cause or consequence.
Moreover, looking at the correlation between these socio-economic indicators and the mounting populism in certain countries illustrates the close link with governance:
Source : DPAM.