Reducing income disparities has always ranked high among the top objectives of policy-makers as a measure to achieve and spread economic prosperity throughout the population. This objective has become even more important because the Great Recession we experienced in recent years has resulted in record-high unemployment rates and an increase in income disparities. In many countries, social protests have ensued.
Delocalization of economic activity, technological change and skills mismatches in fast-changing economic environments are just some of the factors behind the rise of income disparities. They were enough to encourage the World Economic Forum, five years ago, to start thinking about the relationship between an economy’s competitiveness and its capacity to support higher levels of inclusiveness.
Against this backdrop the Forum – following its traditional benchmarking research – engaged in understanding and measuring the relationship between competitiveness on the one hand, and inclusiveness (and environmental stewardship) on the other. The concept of sustainable competitiveness was born. It has led to the inclusion of a “Sustainability-Adjusted Global Competitiveness Index” in the past four editions of the annual Global Competitiveness Report.
This endeavour has helped us understand the complex and often non-linear relationship between competitiveness and inclusiveness. However, on every occasion we have faced an important challenge that prevents us from reporting more conclusive results: data availability. Existing data remains scarce, incomplete and non-comparable.
To date, due to a lack of a better set of indicators, we have used the Gini Index, which measures inequality within a range of 0 to 100, where a value of 0 represents perfect equality (everyone has the same income) and a value of 100 perfect inequality (i.e. one person or household could earn all the income).
The Gini Index is the most popular indicator of inequality because it provides an intuitive interpretation in a context where most other similar indicators are difficult to present to a broad non-technical audience. It is calculated by leading institutions, which makes it the most easily available indicator for a large number of countries.
However, we believe that, taken alone, the Gini Index is imperfect – it does not take into consideration wealth, only income. This means that it does not measure the extent to which those with high incomes have contributed to the growth of the entire economy.
Therefore, it does not indicate what the normative or desirable level of inequality should be. Finally, even when data is available, in many cases it is not collected on a regular basis, or it measures concepts that are either too broad or too narrow, or not calculated with a consistent methodology across countries. As a result, some figures are more than five years old and are incapable of reflecting the rapidly changing reality on the ground – such as the recent financial crisis.
Using out-of-date figures can be misleading for policy-makers, who require statistics that accurately reflect the current situation in order to gain a sense of the effectiveness of their reforms. In order to bridge the gap in measuring inclusiveness and to better understand its relationship to competitiveness, a wider international effort is required. We urge the international community to get together to provide the world with better data, because what cannot measured cannot be managed.
Authors: Cecilia Serin, Roberto Crotti and Beñat Bilbao-Osorio are members of the Global Competitiveness team at the World Economic Forum.
Image: A street vendor selling stems of garlic at a market in a half-demolished old residential site where new and luxury skyscrapers will be built in Beijing February 25, 2013. REUTERS/Kim Kyung-Hoon