Global Economic and Social Trends in OECD & G20 Countries: NRCS Indicators

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Global Economic and Social Trends in OECD & G20 Countries:

NRCS Indicators

National Research Council for Economics, Humanities and Social Sciences (NRCS)

2010

names and affiliated institutions of authors

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Global economic and social trend in OECD & G20 countries:

NRCS Indicators

Contents of Tables

<Table 1> Indicator system………14

<Table 2> Property and source of indicators………..18

<Table 3> Correlations among categories………..20

<Table 4> Correlations between classes (1990-2008)………20

<Table 5> Correlations with GDP per capita: category and class………...21

<Table 6> Total mean and trend of growth rate………..31

<Table 7> Level and growth rate of growth engine indicator by country………..34

<Table 8> Level and growth rate of growth engine2 indicator by country………....37

<Table 9> Level and growth rate of social cohesion indicator by country ...41

<Table 10> Level and growth rate of environmental indicator by country……….46

<Table 11> Level and growth rate of GDP per capita (original data) ……….49

<Table 12> Korea's average annual growth rate by category area (1990-2008)……….54

<Table 13> Korea's relative standing……….……..56

<Appendix table 1> Change in level by category 1……….66

<Appendix table 2> Change in level by category 2………...……..67

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Preface

The National Research Council for Economics, Humanities, and Social Sciences (NRCS) has conducted a project for the entire year of 2010 and developed a new Economic and Social Development Indicator (ESDI) to better understand the development trajectory of the world. This ESDI project aims to introduce a new paradigm of economic and social development to help South Korea as well as the globe make great strides in all aspects of society.

This project is significant in that it supports evidence-based policy making which is more popular and currently spreading across the world. In addition, this study is academically meaningful since it makes great contributions to the efforts of developing alternative indicators to GDP made by several national governments and international organizations.

There are merits and drawbacks found in this type of indicator development project.

Indicators enable us to make a quantitative estimate of the goal attainment. Indicators are also useful in policy making processes since they are convenient tools to measure the present conditions of a society. Furthermore, we can reflect our values, priorities, and preferences directly or indirectly in selecting indicators and thereby stimulate social changes we would like to suggest. As a result, although the indicator development projects bear the burdens of controversial from the standpoint of the exactness and validity of measurements, they become more popular across the world.

In Korea, ESDI studies had not been conducted in a satisfactory manner in the past.

Although there exist some previous research in sociology, we may not find many comprehensive indicator studies in the fields of economics and environmental studies. In recent years, however, various indicator studies have been actively initiated, largely by government-sponsored agencies and institutions. The indicators–under-study are designed to cover a wide range of areas, from socio-economic progress to financial stability, green growth, quality of life, people's happiness, social cohesion, social conflict, national competitiveness, and even North Korean situations.

Given the importance of indicator studies, the NRCS developed an economic and social development index of 30 OECD member countries in 2009 to lay the foundation for further

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indicator studies. Subsequently, in 2010, the NRCS attempted to improve the 2009 study by updating its research methodology and indicator system. Considering the fact that G 20 summit meeting will be held in Seoul in November 2010, this year's indicator study also included G20 members in addition to OECD member countries.^

The 2009 study developed a comprehensive economic and social development index in an attempt to conduct a wide variety of comparative analyses. However, in this English summary of the 2010 study, we mainly focus on reporting relatively simple comparisons of each country’s status by category, class, and sub-class.

To conduct this study, researchers have held bi-weekly intensive seminars since the beginning of this year and exerted their best efforts to improve the validity of the indicators and the reliability of comparison methodologies. As a result, they built pooled panel data from 1990 to 2008 and analyzed the developmental process of the OECD and G 20 members.

Based on the empirical data, this study captured the process through which each country achieved development over the past two decades. The Korean version of this report, scheduled to be published at the end of 2010, attempts to present an upgraded ESDI and fuller version of analyses. In addition, along with the 2010 ESDI study report, a more extensive and detailed monographs will be published at the end of 2010 that analyzes the past and the current state of financial stability, social cohesion, and green growth of the world.

Through these constant attempts, the NRCS will truly position itself as a leading institution of indicator studies in Korean society.

Finally, I would like to extend my sincere thanks to all researchers for their dedicated contribution to the field of indicator study despite limited time and resources. They have spared no effort to improve this project, in less than two years, from the basic to more advanced status. I also would like to express my deepest gratitude to everyone in the Prime Minister's Office and the NCRS who offered their unreserved assistance to this study.

Chairman of NRCS, Cae-one Kim

 The 2010 study includes 31 countries of the OECD members and eight additional members who are G20 members but not OECD member countries, totaling 39 countries.

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Chapter 1. Introduction

1. Backgrounds

This report presents an upgraded version of the economic and social development index (ESDI) study by the National Research Council for Economics, Humanities and Social Sciences (NRCS) in 2009. The NRCS has conducted a series of studies to design a model of sustainable development and an index of socio-economic progress that are consistent with a new paradigm for Korea. Korea needs a new driving force to move forward. But in a new paradigm, sustainable development is only possible when all of economic, social and environmental factors are pursued together and keep a virtuous circle among themselves.

The 2009 ESDI study was conducted to develop an index that reflects a paradigm shift in socio-economic progress and apply it to OECD member countries for comparative analysis.

Comparative analysis was comprehensively done by using panel data of 30 countries over eighteen years (from year 1990 to year 2007) in order to figure out how Korea has changed.

The 2010 ESDI extended the coverage of countries and years with some revise of methodologies. Through the results, we could understand where Korea is now standing and derive policy implications for where it should move forward.

The index of this report consists of three main categories including growth engine, social cohesion, and environment. Growth engine is divided into two classes of growth stability and industrial competitiveness. Social cohesion is also composed of two sub-classes including life security and social tolerance. Environment consists of environmental condition and regenerative capability.

2. Significance of the index study

A comprehensive index for measuring socio-economic development has been recognized as very essential to figure out overall aspects of a society. Nevertheless, it has

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been only a few decades since serious research was conducted to develop such an index. Still the research has mostly been conducted at an individual level, not at a governmental or national level so that overall aspects of a society can be embraced. The ESDI of the NRCS is conducted at the national level and will be useful for comprehensive understanding of the Korean society and other societies, and can become a benchmark of an index development.

Index study requires a balanced point of views in all areas of economy, society and environment. To produce a sensible index, basic studies in each area should be accumulated.

For example, in the economy area, studies of alternative indices to GDP should be proceeded.

In the society area, an index for quality of life or social cohesion should be well developed. In the environment area, studies for a concept of sustainable development should be fully established. Combination of studies in these areas will produce a good index of comprehensively describing various aspects in a country.

In Korea, there have been little index studies in those areas, except for the social area.

The Korean government has long pursued a growth-oriented policy and GDP was the most popular measure for socio-economic development of the whole society. An alternative to GDP that considered social cohesion and environmental issues as well couldn't attract much attention. But a small number of sociologists began to develop a new measure to examine why quality of life has not improved despite economic growth.

Korea's GDP per capita has reached $20,000, but it doesn't show any close achievement to economic one in social and environmental areas. Index study is necessary to grasp why there is a huge gap between economic and other areas. The index study is also important to derive evidence-based policy in the private and public sectors.¹ As a number of international organizations including the OECD suggest, the index study is very needed to understand a country's current situations, to set a goal for the future and to evaluate policies afterwards.

1 It is quite encouraging that the Ministry of Strategy and Finance is planning to develop the national competitiveness index by the end of 2010. It suggests that the Korean government is seeking a more comprehensive development strategy reflecting societal and environmental conditions as well as economic performance.

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3. Summary of the ESDI 2009

The results of the ESDI 2009 study are summarized as the followings. The overall ESDI rank of Korea has changed from 22th in 1990 to 21th in 2007 among thirty OECD countries, which is slightly better than the ranking of GDP per capita (25th in 1990 and 23rd in 2007).

Small open countries such as Switzerland, Sweden, Luxembourg, and Denmark ranked the highest in the overall ranking.

Unlike the improvement in the economic area, Korea has not shown improvement in other areas of social cohesion and environment. Korea ranked 26th in 2007 in the category of social cohesion, declining from 24th in 1990. In the class of life security within social cohesion, Korea only ranked 29th among 30 OECD countries in 2007. In the category of environment, Korea ranked 14th in 1990 and 22th in 2007. In the class of environmental hazards, Korea ranked 27th in 2007, dramatically declining from 17th in 1990.

Overall, Korea showed rapid and continuous improvement in the economic area, while there has been no improvement in social cohesion and worsening in environment. In other words, the economic improvement has not been accompanied by social cohesion and environmental improvement. This suggests that Korea needs to design a new development model which reflects a paradigm shift from a growth-centered one to a new one linking economy with social cohesion and environment.

Besides cross-sectional comparison with OECD countries and time-series comparison with the past, the 2009 report also presented three more results. First, it analyzed the relation between GDP per capita and the ESDI to examine new features and limits of the ESDI.

Second, it compared the ESDI Korea as of 2007 with that of other countries when they had the same level of GDP per capita as that of present Korea. This comparison enabled us to identify in which area Korea needs much further improvement. Third, the hierarchical clustering analysis was conducted for each category of growth engine, social cohesion, and environment. This was helpful to identify varieties of socio-economic development progress among different countries.

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4. The ESDI 2010

The basic framework of the ESDI 2010 is the same as that of the ESDI 2009. The framework of the index consisted of three main categories including growth engine, social cohesion, and environment is in line with that of the Stiglitz Commission report. The Stiglitz Commission report is structured into three groups: 1) economy (GDP issues), 2) society (quality of life sector), and 3) environment (sustainable development). The ESDI includes social cohesion instead of quality of life, since social cohesion is less subjective and more suitable for indexation while quality of life is so broad and very difficult to define, as the Stiglitz Commission report remarks.²

This 2010 report extended the coverage of countries and years. It now includes 31 countries of the OECD members and eight additional members who are G20 members but not OECD member countries, totaling 39 countries, from year 1990 to year 2008. Data is panel data for both cross-sectional and time-series analyses, and we used the LSM for normalization of data to construct the index.³

The remaining of the ESDI 2010 report is composed as follows. Chapter 2 presents the literature review on previous studies, explaining structures, main factors, methodologies, and important results and implications of the studies. The chapter also suggests key conditions for a desirable index of socio-economic development. Chapter 3 presents data description, and presents the results of data analysis first at the global level and second at the level of individual countries. The chapter also provides comparative analysis of Korea with other countries to examine Korea's standing in the world. Chapter 4 summarizes main results, discusses issues and lessons learned from this study, and provides some suggestions for further research.

2 The Korean government created a special committee (President Committee on Social Cohesion) under the President to reflect the importance of social cohesion in the Korean society.

3 See Chapter 2. Section 4. for detailed information about normalization.

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Chapter 2. A New Index of Economic and Social Development

1. GDP : A conventional measure of development and its limitations

GDP (or per-capita Gross Domestic Product) is one of the most common measures of a country’s overall level of social development. It was initially introduced by Kuznets and it has been used since 1934 as an indicator to describe a country's economic performance. It has also been used as a stand-in for presenting a nation's socio-economic well-being.

GDP is a useful tool to gauge the health of an economy in some manner. For instance, its value as an economic indicator of the amount of available products and services, estimated the recovery from the Great Depression of the 1930s. Since World War II, international economic organizations, (i.e. the IMF, IBRD, and World Bank) whose mission was to finance the postwar reconstruction of member states, have introduced and measured GDP, too.

However, using GDP as a social development index often revealed numerous limitations.

GDP is determined by goods and services provided through the market, and it only measures flows, not stocks. It also measures only those items that can be priced or the monetary value of total product. Thus, it does not take income disparity between the rich and the poor into account. It excludes non-market human activities and general well-being of individuals and societies, and also fails to count externalities such as loss of ecosystem (CMEPP, 2008). In sum, GDP is a tool of economic production and aggregated income, but not a suitable estimator for measuring sustainability of growth, reflecting the level of national security, income distribution, leisure time, and environmental degradation.

Within the limits so far mentioned, GDP for measuring social development has faced increasing criticism, and Nordhaus and Tobin (1973) provided alternative economic and social indicators to GDP. In the 1980s, however, criticisms of GDP could not go deeper than those in the mid-1970s, due to the global oil crisis and economic recession at which GDP was treated as more than an economic indicator. Most countries looked to GDP as a barometer showing how well a country was doing. Subsequently, national governments launched GDP-

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based policies to solve economic problems, such as inflation and unemployment. In other words, the economic downturn somewhat abated the desire to measure levels and changes in social development.

In the 1990s and onwards, the usefulness of GDP, as a normative indicator of social well-being, has been questioned. Once their economy had settled, developed countries addressed and created alternatives to GDP partially as a natural follow-up after economic development. With the economic and material needs satisfied, happiness and better quality of life become more important than it used to be. Hence, a new indicator for social development is required. On the other hand, negative consequences of economic growth have raised a question about what GDP captures and how it is used. There has been environmental degradation caused by economic activities. This changed the direction of economic development in a more ecological way. The agreements of the Rio Summit in 1992 also recognized and triggered the development of alternative social indicators that include sustainable growth and the developmental level of society as a whole.

As a result, it seems necessary to develop alternatives to GDP. All new indicators are designed to cover several aspects as follows: capture the quality of life and social integration of a society as well as economic growth; include social issues such as sustainable growth; and address the problems encountered in the use of GDP. The following Figure outlines the changes in need of alternative indicators. At the first stage of development, the indicator only captures economic growth, but the second and third stages incorporate increasing issues of society and the environment as well as economic outputs. These changes in development indicators reflect the widespread social, environmental concerns in tandem with economic growth.

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<Figure 1> The Evolution of Development Indicators

2. Alternative indicators

This section summarizes several alternative indicators to which we refer in order to develop a new economic and social development index as suggested in this report. It focuses on and provides how useful the alternatives are to define the new measures, rather than the overview of main concepts of themselves.

Nordhaus and Tobin (1973) developed the Measure of Economic Welfare (MEW). Their work was a significant attempt to correct GDP that aims to measure economic welfare.

However, the new development indicators in this report do not borrow the MEW formula, since the new measures are designed to overcome the limitations of GDP. Daly and Cobb (1995) introduced the Index of Sustainable Economic Welfare (ISEW) in 1989, based on the MEW and named it the Genuine Progress Indicator (GPI) afterwards. The GPI is known as a comprehensive concept encompassing economy, society and environment as a whole. Still, it fails to receive a good appreciation due to its overemphasis on environmental variables.

The Human Development Index (HDI) is one of the most widely recognized alternatives to GDP. In general, a statistic derived from a number of indicators can better reflect the society than a single indicator. By using a limited set of indicators, such as life expectancy, education and income, however, the HDI fairly captures the level of human development.

The new index introduced in this report is a composite statistic using a handful of indicators as the HDI formula parsimoniously defines. Hence, the new index is strictly based on variables that are important in theory as well as in practice. It also adopts the way of standardization and representation of weighted sums from the HDI formula.

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This report’s objective is the construction of an index of economic and social development. In this regard, alternative indicators proposed by Osberg and Sharpe (2002, 2005) and their studies give useful insights into developing the new index in this research.

Based on cross-national analyses, estimates of the index of well-being are developed for OECD countries for recent decades. This framework is applied here. Therefore, the new index can cover longitudinal and cross-sectional trends in development.

Bergheim (2007) analyzed 22 countries and came up with four happy varieties of capitalism. His paper, "Happy Variety of Capitalism" identifies which countries benefit from happy capitalism. It provides indicators for a happy society from a cluster analysis of these countries. The key lesson of this research is that the new result is created by bringing together 10 commonalities of socio-economic prosperity and subjective well-being reflected in the survey. Our new index is indebted to his cluster analysis and cross-national happiness research.

The Economist Intelligence Unit (EIU, 2005) has developed a quality of life index based on its unique methodology that links the results of subjective life-satisfaction surveys to the objective determinants of quality of life. The report uses the average scores from life satisfaction surveys across countries and relates these scores in a multivariate regression to various factors that have been shown to be associated with life satisfaction. To create our own measure, we took advice on using Beta coefficients from the regression to derive weights of the factors from the report.

The People's Life Indicators (PLI), reported by the Social Policy Bureau of the Economic Planning Agency, depicts the quality of Japanese people’s lives. The first PLI was defined in 1992 and it gives rankings for 47 prefectures in Japan. Although the official ratings of the PLI ended in 1999, it still functions as a reference work to develop the new index. The PLI consisted of eight groups of activities, one of which is divided into four aspects of life:

security, fairness, freedom and comfort. These subdivided and multifaceted indicators of the PLI are to measure the living conditions in various ways. For instance, "divorce" is negative (-) in the comfort category, but it is positive (+) in terms of freedom.

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A report by the Commission on the Measurement of Economic Performance and Social Progress identified the limits of GDP as an indicator of economic and social development, while seeking the more relevant indicators of social progress (Stiglitz, Sen and Fitoussi 2008).

This report emphasized the importance of new indices for capturing socio-economic phenomena. The main view of this report guided us how to develop our new index.

3. The New index of economic and social development

A. Goals: Better measures and better policies

To achieve a better society, a society should provide clear aims and principles which can be empirically measurable to track changes. In doing so, society sets its projects and goals of desirable social development based on general consensus. Social development should be accompanied by economic growth, the rise of civil society, an integrated political system based on confidence and consensus, and active citizenship. It also should espouse the environmental sustainability and economic development for the next generation.

South Korea’s economic development and democratization have enabled social progress.

However, its rapid growth has led to subsequent conflicts among different groups, values and principles. To overcome those conflicts, various groups and rules should interact congruently.

In this respect, an economic development model tries to strike a balance between material growth and social integration. Environmental guidelines also seek a population-ecosystem balance as well as suggesting sustainable growth. In effect, the new index is important for assessing the progress of society and it should cover economic, social and environmental domains in response to the growing demand for sustainable development.

An economy basically consists of a system of physical resources and human capital. The combination of h man labor and capital can lead to stable industrial development and competitiveness. Thus, GDP has been unparalleled as the only measure of economic activity and market performance. Now it is being asked to construct a new index incorporating

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various but well-examined variables. These variables should be a limited set of indicators representing stocks of wealth and social harmony neglected by previous measures.

Social integration or harmony can be measured as a part of social and cultural capital. In a harmonious society, individuals enjoy their freedom, security, and equal opportunities to realize their potentials. The higher level of social integration between groups and individuals implies a better quality of life in the society. In addition to the individual level indicators, public confidence in government and society, transparency of policies, efficiency of the government, and openness to the international society are other indicators of social cohesion.

These are also necessary for a more integrated society.

The rise of environmentalism has been one of the main driving forces to the development of alternative indicators. The environment is another important component of social development. Environmental indicators account for natural resource depletion, ecological balance and sustainable growth. One recent example of environmental indicators is the Green GDP that reflects sustainability of a society.

There should be close relationships among these three domains: the economy, society and the environment. For instance, economic growth should be environment-friendly and contribute to social integration. It should also minimize social discordance. Without the advanced safety and freedom of individuals, economic growth cannot be justified. It became more important to assess its quality of growth and for whom it benefits. A society, in which freedom, security and trust are most truly felt, achieves a high quality of life. At the same time, a transparent and tolerant society can reduce costs of social conflicts and remove social uncertainty. Consequently, it can stimulate economic development as well as sustainable growth.

In this respect, a new development index should be designed to systematically combine and represent social, economic and environmental domains. It also can statistically measure each component. This is not an easy task, but there are a number of index development programs at the regional, national and international levels. These attempts address different types of development including economic growth as well as quality of life. The new index in this report also pursues the comprehensive model that captures multidimensional aspects of

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Korean society. At the same time, it provides a statistically parsimonious and congruent index. The following Figure illustrates the main concepts of the new index of Economic and Social Development.

<Figure 2> The main concepts of the new development index Primary

category Capital Major Contents Previous Index

Growth Engine

Human Capital Material Capital

Stable growth Industrial Competitiveness

GDP/

Competitiveness index

⇑⇓

Social Cohesion

Cultural Capital Social Capital

Individual freedom and life security

Generous society and trustworthy government

Objective/

Subjective QOL/

Social Quality

⇑⇓

Environment ^Natural Resources

Environmental conditions Regenerating capability

GREEN GDP

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B. Categories/Domains and indicators of the new index

The new index consists of three categories: 1) economic growth engine, 2) social cohesion, and 3) the environment. The growth engine category is composed of two classes, stable growth and industrial competitiveness. Indicators of stable growth are income, macroeconomic stability, financial development and economic openness. Income refers to GDP per capita and macroeconomic stability is measured by the volatility of sub-indicators, such as consumer price inflation. The measure of financial development is the size and activity of financial intermediaries and markets. Economic openness refers to trade openness and foreign direct investment. The other class, industrial competitiveness, consists of three indicators: informatization, technological innovation and human capital. The informatization indicator covers the general availability of the Internet, telecommunications and PCs.

Measures of technological innovation are the amount of R & D expenditure and the number of patents. The indicators of human capital are both quantity and quality of labor and the level of educational enrollment.

The second category of the new index, social cohesion, is composed of two sub- domains/classes: the degree of individual freedom and life security, and the level of public confidence in government and social tolerance. The former class, individual freedom and life security is measured by five indicators: freedom, security, empowerment, welfare/distribution and population growth/aging society. Freedom refers to the freedom of economic activities and social policies. Security means the safety of economy and society. Empowerment is denoted by both economic and political empowerment, and social welfare/distribution is defined by social expenditure and income distribution. Population growth/aging society is measured as the fertility rate and the proportion of older people in a society. The other class, public confidence in government and social tolerance consists of two indicators: social capital, and social tolerance. Social capital is evaluated by general trust in others and civil participation. Social tolerance is assessed by tolerance for diversity, including the disabled and foreign nationals. Measures of the confidence in government reflect the level of

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effectiveness, legitimacy, anti-corruption of a government and its contribution to the international society.

The third category, the environment, is made up of two sub-domains: environmental conditions and ecological capability to regenerate. There are two indicators, a level of resource efficiency and environmental hazards, which constitute the environmental conditions. Resource efficiency is about managing energy and water in order to minimize waste. The measure of environmental hazards is the amount of CO2 emissions, the level of PM 10, and the total amount of municipal wastes at the country level. Regenerative capacity refers to the availability of environmental technology measured by the total amount of renewable electricity and the percentage of tap water access. In sum, there are three primary categories comprising six classes and 19 sub-classes.

4. Methodology

The Economic and Social Development Index of 2009 uses the standardization method from Osberg and Sharpe (2005). They basically adopt the standardization method from HDI formula but the maximum and minimum values differ from the HDI model. The maximum value is global Max + 10% and the minimum value is Min + 10%.

The standardization of Linear Scaling Method (LSM) is as follows.

Standardization = (Value-Min)/(Max-Min) Max = global Max +|global Max * 10%|,

Min = global Min - |global Min * 10%|

Each value is represented in a linear form, ranging from 0 to 1. This conversion enables both cross-border and within-border comparisons. It also can avoid convergence in mean that other alternative models have. Thus, the Economic and Social Development Index uses the standardization of LSM.

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Since a fluctuation in a variable can magnify the standardized score, we attempt to minimize the fluctuation effect. Hence, we divide the score by its standard deviation.

However, there are no significant differences between the initial scores and the newly standardized ones. The ESDI 2010 is determined by multiple sets of data that use the LSM.

<Table 1> Indicator system

Category Class Sub-class Description

growth engine

stable growth

income per capita GDP, PPP, $, constant 2005 macroeconomic

stability

Inflation, GDP deflator (annual %) Central government debt, total(% of GDP)

financial development

(private credit by deposit banks and other financial institutions + Equity Market Capitalization)/GDP

(private credit by deposit banks and other financial institutions/GDP) × (stock market total value traded/GDP)

Economic openness

Trade (% of GDP)

Foreign direct investment, net inflows (% of GDP)

industrial competitiveness

informatization

Internet users (per 100 people)

Mobile cellular subscriptions (per 100 people) Personal computers (per 100 people)

technological innovation

Researchers in R&D(per million people, FTE)

Number of Patents Granted(All Patent Types)

human capital

Employment to population ratio, 15+, male (%) Employment to population ratio, 15+, female (%)

GDP per person employed (constant 1990 PPP

$)

Percentage of population, 25-34, total, completed tertiary

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Public spending on education, total(% of GDP)

social cohesion

Individual freedom and

life security

freedom Index of Economic Freedom Freedom of the Press

security

Unemployment, total(% of total labor force) Public and mandatory private Expenditures: Old age

(percentage of GDP)

Employment rates for age group 55-64 Road fatalities per million inhabitants Health expenditure, total (% of GDP) Suicides, deaths per 100,000 population Crimes recorded in criminal statistics, Grand total(rates per 100,000 inhabitants)

empowerment

Labor participation rate, total(% of total population ages 15+)

Freedom Index

welfare, distribution

Public social expenditure as a percentage of GDP

Gini Index

fertility/aging Fertility rate, total

Population ages 65 and above (% of total)

Social tolerance and

government accountability

social capital

trust in people

Institutional confidence Civic engagement

Social tolerance

Protection of disabled workers degree of tolerance

Stocks of foreign population government

accountability

Government Effectiveness Rule of Law Index

CPI (Corruption Perception Index) Net ODA Ratio to GNI

environment

environmental

condition resource efficiency

Total Primary Energy Consumption Total gross water abstractions

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CO2 emissions PM10, country level

Total amount generated of municipal waste

regenerative capability

renewable

energy Total Renewable Electricity Net Generation water, sewage Proportion of the population using improved

drinking water sources

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Chapter 3. Data Analysis and Application

1. Data

1) Data property and source

The data used in this study are the panel data of 39 countries, including 31 OECD and 8 member countries of G20, over 19 years from 1990 to 2008. The data largely consist of three types: time series data, survey data, and index-type data. When time series data or index data were missing, they were filled in by trend-extrapolation or interpolation. Missing survey data were filled in by step functions.

When there was a serious problem of outlier in some variables, a usual method of normalization was not applicable. To resolve this problem and increase item discrimination, this study applied a modified LSM for normalization.⁴ For example, inflation ranged from - 13 percent to thousands percent. Inflation of thousands percent means that it is already uncontrollable: usually inflation over 20% is regarded as too high and beyond a controllable level. Thus when we normalize inflation, the values over 20% were considered outliers and given equal values of normalization whether inflation was 100% or 2,000%. Also, this study assumed that inflation in the range of 0% and 2% is the most desirable. All the values beyond this range were considered symmetrically less desirable. For example, -3% which is 3%

below the lower limit of the range was assumed to be equally bad with 5% which is 3%

above the upper limit. FDI also has a serious problem of outlier. The FDI-to-GDP ratio does not exceed 20% in all countries except Luxembourg where the ratio is over 20,000%. Thus, all the values over 20% were allocated the same normalization value as that of 20%.

When data were missing over the entire period, it was impossible to fill in data and the country itself was excluded from the analysis. For example, the data of financial development

4 This study used the LSM for normalization, in which the denominator increases with the range of a variable. To increase item discrimination, outliers should be adjusted if they are too much different from other values.

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could not be obtained for China and it was excluded from the calculation of the growth engine index. However, the analysis of growth engine excluding China would not make sense, given the reality that the Chinese economy has demonstrated the most remarkable growth in the world economy over the past decades. Considering this, two indicators were made, one by including China and the other by excluding China. Data description is summed up in Table 2 below.

Data analysis were conducted at two levels: One was to keep track of global trends over the past two decades by using the panel data, and the other to capture national features of 39 countries. First, at the global level, overall trends in each category of growth engine, social cohesion, and environment over the past two decades are analyzed. Second, at the national level, to capture the changes that have occurred in each country during the period, this study conducted both static analysis by calculating rankings at the starting point (1990) and the ending point (2008) and dynamic analysis by examining the trend of changes in the 1990s (1990-2000), in the 2000s (2000-2008), and over the entire period (1990-2008) in each category.

<Table 2> Data description

Description Main source Property Countries with missing data value

GDP per capita

World Bank WDI Hard

Inflation Hard

Proportion of government debts World Bank WDI,

CIA Factbook Hard

Financial current liabilities /GDP + Aggregate market value of listed stocks

/GDP World Bank, Financial Structure Dataset

Hard China

Private credit of financial institutions

/GDP + stock exchange volume /GDP Hard China

Trade volume ratio

World Bank WDI

Hard

FDI(inflow) ratio Hard

Proportion of Internet users Hard

Proportion of mobile phone subscribers Hard

PC penetration rate Hard

Proportion of workers in research &

development UNESCO Hard

No. of U.S. patent registrations USPTO Hard

Male /female employment rate

World Bank WDI Hard

Labor productivity Hard

Higher education completion rate World Bank, Education Statistics Hard

Proportion of educational expenditure UNESCO Hard

Economic freedom index Heritage Foundation Survey

Press freedom index Freedom House Survey

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Unemployment rate World Bank WDI Hard

Social expenditure for the aged. OECD stats Hard Chile, non-OECD

Senior employment rate ILO Hard China

Road fatality rate UNECE Hard Brazil, China, Saudi Arabia

Proportion of health expenditure

WHO Hard

Suicide rate Hard Indonesia, Saudi Arabia

Crime rate UNODC Hard Brazil

Labor participation rate World Bank WDI Hard

Democracy of political system Freedom house Survey

Welfare expenditure OECD Factbook Hard Chile, non-OECD

Gini coefficient UN University Hard Saudi Arabia

Ratio of birthrate to aged population World Bank WDI Hard General trust / institutional trust

World Values Survey Survey

Citizen participation index Survey Saudi Arabia

Number of laws on workers with

disabilities ILO Hard

Tolerance of others World Values Survey Survey

Proportion of foreigners World Bank WDI Hard

Government effectiveness index World Bank, Worldwide Governance

Indicators Survey

Rule of law index The World Justice Forum Survey

Corruption perception index Transparency International Survey

Official Development Assistance OECD stats Hard

energy consumption /GDP EIA Hard

Extracts from fresh water/GDP FAO Hard

CO2 emissions/GDP

World Bank WDI Hard

Concentration of fine dust Hard

waste disposal/GDP OECD stats Hard Indonesia, Saudi Arabia

renewable energy use/

total energy use EIA Hard

Proportion of population using tap water and sewage distribution to population

UN Millennium Development Goals

Database Hard

2) Correlation analysis

As a preliminary analysis, we examined correlations among main category indicators and among class indicators. Table 3 shows that there are high correlations among main categories: the correlation coefficients range from 0.65 to 0.85. One thing to note is that the correlation between growth engine and social cohesion has increased from 0.79 in the 1990s to 0.85 in the 2000s. This may suggest that the world economy is pursuing a development model that reflects social cohesion in the process of economic growth.

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<Table 3> Correlations among categories

1990s 2000s

Growth engine

Social

cohesion EnvironmentGrowth engine

Social

cohesion Environment Growth

engine 1.00 0.79 0.65 1.00 0.85 0.65

Social

cohesion 0.79 1.00 0.75 0.85 1.00 0.72

Environment 0.65 0.75 1.00 0.65 0.72 1.00

Table 4 also shows that classes are highly correlated with one another, although their coefficients are on average lower than those among main categories. The correlation is the highest (0.90) between two classes within the main category of growth engine. This result may be predictable to a degree because economic variables tend to have time trends and are closely related with each other. The coefficient between freedom/security and government accountability within the category of social cohesion is also high at 0.83. In contrast, the classes within the category of environment show the lowest correlation of 0.20.

<Table 4> Correlations among classes, 1990-2008

Stable growth

Industrial competitiveness

Freedom &

security GovernmentEnvironmental conditions

Regenerative capability

Stable growth 1.00 0.90 0.59 0.69 0.71 0.25

Industrial

competitiveness 0.90 1.00 0.69 0.74 0.67 0.37

Freedom &

security 0.59 0.69 1.00 0.83 0.50 0.65

Government 0.69 0.74 0.83 1.00 0.53 0.52

environmental

conditions 0.71 0.67 0.50 0.53 1.00 0.20

Regenerative

capability 0.25 0.37 0.65 0.52 0.20 1.00

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Finally, we examined the relationship of main categories and classes with GDP per capita which used to be the most popular indicator of socio-economic development. The category of growth engine shows the highest correlation of 0.86 with GDP per capita. The correlation between GDP per capita and social cohesion is also high at 0.73, suggesting that relations between economic growth and social cohesion were not exclusive. Environment and GDP per capita also have a high correlation of 0.66.

This implies that they are not in trade-off but in mutually reinforcing relationship for sustainable development.

<Table 5> Correlations with GDP per capita

Category Class

Growth engine

Social

cohesion Environment Stable growth

Industrial competitiveness

Freedom/

security Government environmental conditions

Regenerative capability Entire

period 0.86 0.73 0.66 0.89 0.87 0.60 0.74 0.66 0.35

1990s 0.89 0.74 0.69 0.90 0.90 0.58 0.76 0.67 0.42

2000s 0.87 0.73 0.61 0.87 0.88 0.60 0.74 0.61 0.30

2. Global trend analysis

1) Economic and population sizes

This study developed socio-economic development indices using the data of the world's 39 leading countries. Although the countries included in this study were limited because of difficulty in collecting data, they represent well enough the overall figure of the world. As of now, their GDP and population account for 84.0% and 64.1% of the total world GDP and population. The proportion of their GDP to the world GDP has little changed over the past two decades (Figure 3). The proportion of 31 OECD countries alone amounts to 76% of the world GDP.

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<Figure 3> Proportion of the OECD and G20 members in the world GDP

83.8%

16.2%

OECD+G20 the rest of the world 1990

83.6%

16.4%

Source: 2010 Maddison data

On the other hand, for the past 20 years, their share of the world population has slightly fallen by 3.2% from 68.3% in 1990 to 65.1% in 2008. The proportion of the OCED members alone in the world population is only 17.9% in 2008. This suggests that a small portion (17.9%) of the population accounts for a large portion (76%) of the world's total income and economic power is skewed towards those developed countries.

<Figure 4> Proportion of the OECD and G20 members in the world population

68.3%

31.7%

65.1%

34.9%

Source: 2010 Maddison data

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2) Global trend

(1) Basic trend

To examine the basic trend, this study compared the time trend of categorical indices with that of GDP per capita of the world and 39 countries. Figure 5 presents the time-series trend of the indices for growth engine, social cohesion, and environment, and that of GDP per capitas. From the Figure we can derive four noteworthy features. First, GDP per capita of the whole world including larger samples is below that of 39 countries and its growth rate is also lower compared to the OECD and G20 members. Second, the category of growth engine has shown the fastest growth rate, surpassing the rate of increase in GDP per capita. Third, the category of social cohesion has little changed during the period from 1990 to 2008. This lack of change in social cohesion is attributable to the meager improvement of a few countries with a low degree of social cohesion, rather than to the overall trend of all countries surveyed. As a consequence, the gap among the countries tends to widen in the social cohesion category. Fourth, the environment index went up slightly and steadily for the past two decades, which demonstrates continuous improvement in the environmental level.⁵

<Figure 5> Global trend of indices

5 More detailed explanation about the trends of growth engine, social cohesion, environment and GDP per capital is presented in the next section.

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.1.2.3.4.5.6

1990 1995 2000 2005 2010

year

growth engine social cohesion environment global GDP per capita GDP per capita

(2) Analysis of distributional variation

To track distributional changes among the countries in each category of growth engine, social cohesion, and environment, we also looked at the coefficient of variation and the histograms of each category. The coefficient of variation was calculated by dividing standard deviation by the mean. It is a useful statistic to comprehend gaps and variations among countries in the same category. Unlike dispersion and standard deviation that represent the absolute size of the data's scattered distribution, the coefficient of variation is a relative concept that reflects the distribution of variables without being influenced by the unit of measurement. In other words, the coefficient of variation is unit-free because it is normalized by dividing standard deviation by the mean.

From Figure 6 which shows the coefficient of variation, we can find the followings. First, in the case of growth engine, although the change was not so apparent, its coefficient of variation has gradually become smaller since 1990. It began to increase in 1997, when the Asian financial crisis occurred, but then decreased gradually again in the mid-2000s. This suggests that the gaps among 39 countries in growth engine widened amid the Asian financial crisis, then narrowed owing to the process of opening and integration of the world economy in the early 2000s. This pattern is similar to that of the coefficient of variation in GDP per capita. Second, the coefficient of variation in environment exhibited the most remarkably rapid decrease, which means that the environmental gaps among the counties reduced rapidly.

This seems to have resulted from sharing global awareness of and making active efforts for

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international collaboration to resolve global warming and other environmental issues, since the countries signed the Kyoto Protocol on climate change. Third, only the coefficient of variation in social cohesion shows an increase, albeit very slight. This is in contrast to the relatively gradual improvement in the economic and environmental gaps. It suggests that the gap among 39 countries in social cohesion worsened over the past two decades in spite of the world's continuous economic growth. Some advanced countries made efforts to build a more integrated society by more emphasizing the quality of individual life, empowerment, considerateness and tolerance while other less advanced countries failed to nurture such social cohesion. Thus, we need to pay more attention and conduct further studies to figure out how the worsening social cohesion will ultimately influence growth potential and social changes within individual countries.

<Figure 6> Coefficient of variation

.1.2.3.4.5.6

coefficient of variation

1990 1995 2000 2005 2010

year

growth engine social cohesion environment GDP per capita

Figure 7 through Figure 10 show histograms of each category in 1990 and 2008.

Regarding GDP per capita and growth engine in Figure 7 and Figure 8, one thing clear is that the median in 2008 is higher than in 1990. But the distribution leads to a less clear

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conclusion: the gap among the countries has littly changed or slightly narrowed, if any, during the period.

<Figure 7> Distribution of GDP per capita⁶

-2 02468

Frequency

0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1

1990

-2 0246

Frequency

0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1

2008

<Figure 8> Distribution of growth engine

6 The axis “x” in <Fig. 7>, <Fig. 8>, and <Fig. 9> indicates the standardized mean by category area and axis “y” represents the number of countries.

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-2 02468

Frequency

0 .1 .2 .3 .4 .5 .6 .7

1990

-2 02468

Frequency

0 .1 .2 .3 .4 .5 .6 .7

2008

Figure 9 shows that the degree of social cohesion improved on average and the gap among countries worsened: the median of 2008 is greater than that of 1990 and the inter- quartile range broadened and the distribution was skewed left in 2008. Also, Figure 10 clearly shows that as in the analysis of coefficient of variation, both the level and gap of environment improved: as the median moved to the right and the inter-quartile range sharply narrowed, the shape of distribution became almost symmetrical.

<Figure 9> Distribution of social cohesion

-2 02468

Frequency

.2 .3 .4 .5 .6 .7

1990

-2 0246

Frequency

.2 .3 .4 .5 .6 .7

2008

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<Figure 10> Distribution of environment

03691215

Frequency

0 .1 .2 .3 .4 .5 .6 .7 .8 .9

1990

03691215

Frequency

0 .1 .2 .3 .4 .5 .6 .7 .8 .9

2008

(3) Analysis by national group

We also classified 39 countries into several groups and conducted group comparisons.

The first comparison is between OECD and non-OECD members within the G20 group, and the second between G20 and non-G20 countries within the OECD group.

As seen in Figure 11, the gap between OECD and non-OECD members within the G20 group is still wide.⁷ However, the positive side is that although the gap in growth engine was not greatly reduced, the gap in environment is reducing due to non-OECD members' great efforts to improve environment. New global interest in improving environment has increased, and most countries, in particular "runner-up" countries, are accelerating efforts to improve environment.

Figure 12 shows that gaps still exist between G20 members and non-G20 members in all categories of growth engine, social cohesion, and environment, and it poses a new pending issue to G20 members. While the gap in environment between two groups remarkably narrowed during the period, the gap in social cohesion between two groups has reversed and

7 Unfortunately, comparison of social cohesion was not possible because data on the social cohesion of the non-OECD G20 countries were missing.

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increased since the beginning of the 2000s. This suggests that in addition to the current agenda of G20 summit meetings to enhance growth potential and resolve the economic imbalance among countries, concerted efforts to reduce the social cohesion gap among countries should be a new important agenda.

<Figure 11> Comparison between the OECD and non-OECD economies

.2.3.4.5

1990 1995 2000 2005 2010

year

OECD non-OECD

growth engine

.4.45 .5.55 .6.65

1990 1995 2000 2005 2010

year

OECD non-OECD

environment

<Figure 12> Comparison between the G20 and non-G20 economies