Economic sustainability: measurement and success What is the meaning of economic sustainability? As technology and the availability of goods and services constantly evolve, no economy is sustainable in a stationary state. Every economy, enterprise, individual needs to constantly evolve and adapt to changing circumstances. What is sustainable today may not be tomorrow: in the debate about sustainability a concept of adaptability is implicit. As we cannot predict the future, and economies are constantly subjected to unforeseen shocks, we do not know what might be sustainable tomorrow, and for how long. We may know what is not sustainable. Current trends may be clearly unsustainable if extrapolated into the future: this is especially the case with respect to environmental impact and some socio-economic trends such as rising inequalities and poverty. Thus one way to discuss sustainability is to point to aspects, which are clearly unsustainable. All economies display traits that are unsustainable, the question is whether they can be corrected on time before they cause excessive costs (it is very likely that some costs will need to be borne anyhow, before issues are corrected; the question is: what type of costs and how large can they be, before they become acutely “unsustainable”?) Adaptability is a function of many things. One is tempted to say that it is primarily a function of the ability to identify unsustainable trends early on, and correct them before very large costs are incurred. But this is not easy to measure or discuss with social sciences methods, particularly as a temporal consideration implies uncertainty. Adaptability is also deemed to be a function of diversification. Per se, economic logic rather favors specialization than diversification – each individual or enterprise should concentrate on what he/she/it can do best, his/her/its comparative advantage. The increasing importance of global value chains for development emphasizes this economic logic, by moving competition from entire sectors to single stages of production, and even individual jobs. However changing circumstances (movements in terms of trade) can be unfavorable for the given specialization. Economic history provides several examples of the rapid demise of specific industries due to technological progress or exhaustion of natural resources. In some cases economic actors whose specialization has been challenged have successfully reinvented themselves, adapting more or less radically to a new specialization; in other cases this has not succeeded and economic actors have decayed and disappeared. This is the daily reality of Schumpeter’s creative destruction. 3 At the level of sovereign countries, however, creative destruction is not considered a beneficial phenomenon. Countries are expected to continuously prosper in line with the rest of the world, preferably in a context of progressively narrowing distances in income per capita. If we were to define success in sustainability by the relative dynamic in average income per capita, then undoubtedly the major oil exporters have been extremely successful over the past fifty years, especially if income is defined as GNI, and “capita” are nationals only. Doubts about sustainability must then be understood with respect to the possibility that his trend might be reversed in the future. However, GNI per capita may no longer be a valid metric, as income inequalities between nations have been closing (the so-called 'great convergence') while those within nations have been growing rapidly. This phenomenon was observed worldwide, and in commodity exporting countries alike. So is average GNI per national the right measure of success? Unlikely. Is not a concept of disposable income more relevant? How relevant is income distribution? What about participation in the labor force and employment? All of these seem to be relevant aspects of sustainability of an economy in the long run. In other words, we may need to shift from a purely economic to a realistic socio-political concept of sustainability. This however entails a considerable degree of subjectivism, as the tolerance of societies and polities for concentration of income and wealth, or exclusion from meaningful employment, is extremely variable. It shows the need to revalue local contexts to balance the now predominant large-N quantitative analyses. Sustainability therefore is a multidimensional concept, which does not tolerate a simple measure. Attempts to narrow down the notion of economic sustainability inevitably create excessive simplification and are not useful. The specific dimensions of sustainability have varying importance in different contexts. It is a historical fact that some societies tolerate higher income and wealth concentration, or even absolute deprivation, than others. It is also a fact that similar levels of official debt to GDP ratios or government fiscal deficit have different impact in the perception of sustainability of different economies. Can we find measures of sustainability that are universally valid? Does it make sense to aim at establishing a sustainability index? (The Bertelsmann Stiftung has launched a Sustainable Development Goals Index; the SDGs themselves are a collection of motherhood statements unless they are weighted and prioritized). 4 Diversification Coming back to diversification, this is by far the most commonly referred to metric for sustainability. There are three main indicators of diversification that are frequently referred to: 1. Share of main industry/product group on total value added (GDP) 2. Share of main industry/product group on total exports 3. Share of main industry/product group on total income received by the government These are obviously by no means the same. Each of the three measures has good rationale, but they do not necessarily converge, nor have univocal meaning. The problem with measuring diversification with respect to composition of GDP is that the latter is measured in current prices, and is therefore a function of changing terms of trade as much as, or more than, of the prosperity of each individual industry. Hence decreasing diversification may be the outcome of improving terms of trade of the leading industry, itself a manifestation of its growing competitive advantage rather than the opposite. The problem with measuring diversification with respect to composition of exports is that it should at least be set against the degree of openness of an economy, i.e. share of total exports and imports on GDP, and of the balance of trade (a country with a large trade surplus is presumably in a better position to withstand a decline in the demand for its main export product). The problem with focusing on fiscal revenue is that countries do not normally balance their budgets; have very different rigidities on the expenditure side (state employment? subsidies? weapons? capital expenditure?), and very different potential for substituting one source of revenue with another one. Furthermore, new sources of revenue are only developed when needed: it is very difficult to increase taxation or reduce expenditure when revenue is pouring in in abundance, simply on the basis of the assumption that sooner or later (when?) this may change and one should be prepared. While theoretically often favorable, such measures are practically too controversial on political and social grounds to be implemented (whether in commodity exporting countries or so-called 'diversified economies'). More sophisticated attempts to measure diversification are based on input-output tables (how closely intertwined are the different sectors in the economy? or are most 5 intermediate cells simply empty?) or on Hausmann’s and co. products space (“similarity” of sectors). Measures of diversification are also deeply dependent on classification: what is our unit of observation? Inevitably, we use standard existing statistical classifications such as SITC. But not only there is profound difference in measuring diversification at one, two, three or more digit level; at each level, groupings display much different diversity in each group. “Passengers vehicles” is obviously a much more diverse lot than “petroleum distillates”. Much statistical analysis of the resource course is conducted on the basis of a “primary” or “mineral products” category; with no attention to whether there is one main mineral or several, and what characteristics they have. Diversification is also a function of the stage considered in the value added chain. Oil production may be considered a uniform activity, but moving upwards or downwards from oil production in the value chain increases diversification very significantly. Already oil refining is a significant step in moving from a single to multiple different products; in any case moving further into basic and even more secondary petrochemicals adds formidable diversification in terms of technology, products, markets etc. Stating that moving from the production of crude oil to the production of paints or pharmaceuticals from methanol is no diversification because “when oil will run out” it won’t be able to continue is rather ludicrous. Most industrial plants are not supposed to have a productive life of more than twenty-thirty years (or, in fact, less) and oil will not run out anytime soon.