Social Cohesion in troubled times – On some blind spots of growth and inequality interactions

Global - Feb 13 2019
  • #esg

Social Cohesion in troubled times – On some blind spots of growth and inequality interactions

The XXth century has experienced major economic development and a fall in poverty rates, but this has not led to the disappearance of social instability and cohesion issues. This fact can provide an illustration of why the analysis of sovereign risks cannot be summarized in only economic and financial data, and of why both qualitative and ESG (extra-financial) assessments provide essential information. In this regard, social cohesion issues today represent risks that should not be neglected, both globally and at country-level, in relation with not only socio-political drivers but also notable poverty and inequality levels. Unlike what traditional indicators suggest, and despite some obvious progress on some key aspects, recent historical trends are probably less positive than it may seem. Indeed, the recent period illustrates very well the fragility of the current social stability achieved in developed countries. Here, we can point to the surge of populist or new movements in many European countries (e.g. Five Star movement, Podemos, Syriza, etc.), the electoral success of such movements or candidates on anti-establishment claims in key elections (such as Trump in the USA), fragmentation trends in countries (the 2014 Scottish independence referendum, Catalonia’s 2017 declaration of independence, fragmentation patterns in countries such as Belgium, etc.) and regions (e.g. the Brexit), or cases of social unrest as with the yellow vest protests in France, or notable instability in some developing countries bringing to light notable weaknesses in relation with, for example, fuel and energy prices (e.g. Venezuela, Zimbabwe, etc.). The purpose here is not to discuss specific individual cases, but these can certainly draw our attention upon some potential blind spots of the global economic development experienced during the last 150 years. Indeed, what can be behind the socio-political weaknesses and expressions of social dissatisfaction that can be observed today in many countries, and even in the richest ones? The question is too wide to be fully addressed here, but since economic conditions are often at stake in current cases of social unrest, let us have a look at poverty and inequality levels.

The decreasing trend of extreme poverty and poverty headcount ratios

Globally, the poverty trend presents very positive aspects. While the world population has been multiplied by 6 since 1850, some researchers estimate that the share of people in extreme poverty has fallen from 90% to 10% on the period (based on the share of the population below 1.90 international USD per day).

Evolution of the global share of the population in extreme poverty

Note: People are considered to live in extreme poverty at a consumption level below 1.90 international USD per day. International USD are adjusted for price differences between countries and for inflation.

Sources: Max Roser based on World Bank and Bourguignon and Morrisson (2002); Our World in Data.

This performance has largely been supported by the GDP growth and its multiplication by 11.5 globally since 1870 in real terms (Maddison Project Database 2018), and it also corresponds to more recent trends. For example, poverty headcount ratios have dropped from 66% and 42% of the global population in 1981 at 5.50 and 1.90 USD levels (in 2011 PPP), to 46% and 10% in 2015.

Evolution of world’s poverty headcount ratios since 1981

Note: Poverty headcount ratios are the percentage of the population living on less than a given level of resources per day at 2011 international prices.

Source: World Bank

More mixed trends beyond usual poverty metrics

However, these positive aspects hide some major facts that can help explain the persistence of cases of social instability. First, although poverty has been decreasing in relative terms, it is less obvious in absolute terms (even if the trend tends to have become more positive since 2000). From 1981-2015, the number of people below 1.90 USD/day thus fell by 61%, but the number of people below 5.50 USD increased by 13% (400 million people).

Evolution of world’s poverty headcount numbers since 1981

Note: Poverty headcount ratios are the percentage of the population living on less than a given level of resources per day at 2011 international prices.

Source: World Bank

Another indicator is also interesting to look at to put into perspective the reduction in poverty ratios observed globally. To some extent, poverty was less “avoidable” before the historical watershed that the economic boom of the XXth century represented. As underlined by researchers as Thomas Pogge or Jason Hickel, the analysis of poverty must not be analysed only in relative or absolute terms, but also in comparison with our capacity to act on it. Indeed, poverty is not only a matter of thresholds but also a matter of social perception and equity in the distribution of wealth, with notable stakes in terms of social cohesion. But in this regard the current global trend tends to be much more negative, which can explain why poverty situations can be causes of growing instability in or across some countries.

One of the ways to assess this situation (adjusted by our capacity of action) is to assess the poverty “gap” (the cost of lifting all people above the poverty line) and compare it with the total income of those who are already above this poverty line (or, for example, twice above it). For example, Jason Hickel analysed the share of the total income of all the people living with more than 14.80 USD/day (in 2011 PPP) that would be required to lift all people below 7.40 USD/day to this 7.40 USD threshold. This share decreased from about 13% to about 4% between 1990 and 2013, making it 3.3 times less “costly” in relative terms (-70% reduction) to ensure everyone has at least 7.40 USD of income per day. But on the period, the share of people below 7.40 USD/day has improved by a factor of only 1.2 (from 72% to 58%, -19% reduction). The gap between these two evolutions means that our growing capacity to solve poverty has only partly benefitted the poorest. In other words, even if less people are below the 7.40 USD/day poverty line, the gap between their situation and global economic resources that could address it has significantly widened.

Even despite major potential benefits in terms of poverty alleviation, economic growth itself can, thus, be a double-edged sword, especially when it slows as it may become more difficult for all to continue to receive notable benefits from it (and not discussing here the possible additional question of the long-term sustainability of growth). Indeed, what can matter is not only the growth itself but also the distribution of its benefits, as well as the perception of the fairness of this distribution, as matters of social cohesion.

1990-2013 evolution of the 7.40 USD poverty headcount ratio and of our capacity of action (world)

Relative cost to ensure at least 7.40 USD/day to the world's population: the share of the total income of all the people living with more than 14.80 USD/day (in 2011 PPP) that would be required to lift all people below 7.40 USD/day to this 7.40 USD threshold

Sources: World Bank, Jason Hickel

Growing inequality trends can also be observed at country level. Based on the 15 main economies for which sufficient data are available, it can be observed that inequality tends to have been growing in several large countries in the recent decades, although trends can also depend on each case. In addition, it should be noted that the inequality ratios presented below are in relative terms, so that they under-represent the magnitude of inequality growth in absolute terms in the context of growing economies. This tends to underline a trend towards growing inequality in absolute terms, in line with the poverty data discussed above.

Evolution of various inequality ratios based on the latest data available

Note: since c.1980 for the USA, Brazil, Canada, Argentina and Thailand; since 1991 for Germany; and since c.2003 for other countries

Quintile ratios: Income share held by highest 20% / share held by lowest 20% – Decile ratios: Income share held by highest 10% / share held by lowest 10% – Palma ratios: Income share held by highest 10% / share held by lowest 40%

Source: World Bank

To conclude

As a conclusion, we should not let ourselves be blinded by the massive economic development experienced during the previous century and which continues to characterize our economies globally. Not only has growth significantly slowed in the last decades, but it has also blind spots. Inequality is one of them, especially when assessed in absolute terms. Even if passion for equality can present excesses, as outlined with talent by Tocqueville in Democracy in America, it is also true that inequality and poverty trends can cause much harm to social cohesion, especially when the capacity to act on them is high, and actual action by decision-makers is perceived as insufficient.

These elements are not the only causes of today’s socio-political tensions, but they certainly play a notable role in some key cases and should draw more of our attention in the analysis of specific sovereign risks. Indeed, while it is relevant to focus first and foremost on poverty issues in absolute terms (as through GDP per capita), economic poverty can also be a matter of relative disparities resulting in a feeling of economic injustice and in damages to social cohesion. This is what social unrest events can show, and it can also serve as evidence in even deeper structural issues. For example, according to a 2018 IPSOS survey, a higher share of adults in France, the UK or Germany are pessimistic than optimistic about the future of their country, and some surveys suggest even less positive perceptions of the future, in particular in some developed countries Pew Research Center 2015, Ipsos MORI 2014). After decades of development and improving living conditions, general perceptions of the future are actually pretty ambivalent.

Hence the relevance of ESG factors to better assess financial risks and address the blind spots of purely economic and financial indicators. This also illustrates well why ESG factors matter not only for sovereign analysis but also for other asset classes, on which country dynamics have unavoidable macro implications. Lastly, this illustrates the need for ESG frameworks to be able to assess not only “key performance indicators” but also (more fundamentally) more structural “patterns”, “shifts” or “trends” such as those being reflected by current cases of socio-political uncertainties in Europe and elsewhere. In a way, could one of the reasons for the current development of ESG actually be a growing awareness (whether fully conscious or not) of our need for more interdisciplinary analysis of investment risks? In any case, in a context of notable shifts, complexity and uncertainties, some interdisciplinarity certainly makes sense.

Guillaume Emin, Head of Client Solutions                                                                                               Sources available via hyperlinks

 

 

 

Our latest
publications

Title
Category
Tag
Country
Date
Analyst insight
#ESG
Global
2019-10-19
Analyst insight
#Carbon #ESG
Global
2019-10-19
Analyst insight
#ESG
Global
2019-10-19
Research note
#ESG
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#ESG
France
2019-10-19
Analyst insight
#Credit Risk #ESG
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change #Environment
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#ESG
France
2019-10-19
Analyst insight
#Carbon
Europe
2019-10-19
Weekly food for thought
#Carbon
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#Credit Risk
United States
2019-10-19
Analyst insight
#Environment
Northern Area
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Europe
2019-10-19
Weekly food for thought
#ESG
France
2019-10-19
Weekly food for thought
#Credit Risk
Peru
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
World
2019-10-19
Weekly food for thought
#ESG
France
2019-10-19
Weekly food for thought
#Credit Risk #GDP
Europe
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#Credit Risk
France
2019-10-19
Analyst insight
#Credit Risk #France
Europe
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
Global
2019-10-19
Weekly food for thought
#GDP
Europe
2019-10-19
Analyst insight
#ESG
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#Carbon #ESG
France
2019-10-19
Weekly food for thought
#Credit Risk
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
Europe, USA
2019-10-19
Weekly food for thought
#GDP
France
2019-10-19
Analyst insight
#Environment
France
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change #ESG
Global
2019-10-19
Weekly food for thought
#Credit Risk #GDP
China
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#ESG
USA
2019-10-19
Weekly food for thought
#GDP
Global
2019-10-19
Analyst insight
#Credit Risk #Sovereign Debt
Global
2019-10-19
Weekly food for thought
#Carbon #Climate #IPCC #WMO
Global
2019-10-19
Weekly food for thought
#Carbon #Inequality #Paris Agreement
France
2019-10-19
Weekly food for thought
#GDP #Sovereign Debt
Italy
2019-10-19
Analyst insight
#Credit Risk #GDP #Geopolitics #Sovereign Debt
Global
2019-10-19
Weekly food for thought
#Environment
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #GDP
Global
2019-10-19
Weekly food for thought
#GDP
France
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Environment
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Environment
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Environment
Global
2019-10-19
Analyst insight
#GDP
Brasil
2019-10-19
Weekly food for thought
#Environment
Venezuela
2019-10-19
Weekly food for thought
#Environment #Natural Capital
Norway
2019-10-19
Analyst insight
#Carbon #Carbon/Climate Change #Climate
United Kingdom
2019-10-19
Weekly food for thought
#Agriculture #Biodiversity #Climate #GHG #Greenhouse gases
Global
2019-10-19
Weekly food for thought
#Biodiversity #Climate #Environment #ESG #IPCC #Oceans #SIDS
Global
2019-10-19
Weekly food for thought
#Credit Risk #GDP
France
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Europe
2019-10-19
Weekly food for thought
#Carbon/Climate Change
France, Canada
2019-10-19
Weekly food for thought
#Credit Risk #GDP
Argentina
2019-10-19
Analyst insight
France, Egypt
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate
France
2019-10-19
Weekly food for thought
#GDP #Sovereign Debt
Germany
2019-10-19
Weekly food for thought
#Environment #ESG
Global
2019-10-19
Analyst insight
#GDP #Natural Capital #Sovereign Debt
South Africa, France
2019-10-19
Weekly food for thought
#Credit Risk #Sovereign Debt
United States
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change #Environment #ESG
Global
2019-10-19
Weekly food for thought
#Carbon/Climate Change #Climate
Global
2019-10-19
Weekly food for thought
#ESG
India
2019-10-19
Weekly food for thought
#Credit Risk #GDP
USA, Japan, European Union
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #GDP #Paris Agreement #Sovereign Debt
Global
2019-10-19
Weekly food for thought
#Climate #Environment #Paris Agreement
Small Island Developing States, Global, Barbados, Fiji
2019-10-19
Weekly food for thought
#Credit Risk #GDP #Sovereign Debt
Venezuela
2019-10-19
Analyst insight
#Carbon #Carbon/Climate Change #Climate #Credit Risk
Global
2019-10-19
Analyst insight
Global
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate
Global
2019-10-19
Weekly food for thought
#Credit Risk #GDP
Global
2019-10-19
Analyst insight
#Biodiversity #Environment #Natural Capital
Brazil
2019-10-19
Weekly food for thought
#Credit Risk #Sovereign Debt
United States
2019-10-19
Weekly food for thought
#Carbon/Climate Change
Global
2019-10-19
Analyst insight
#Credit Risk #Sovereign Debt
United States
2019-10-19
Analyst insight
#Carbon/Climate Change #Credit Risk #ESG #Natural Capital
Global
2019-10-19
Analyst insight
#Carbon #Carbon/Climate Change
Europe
2019-10-19
Weekly food for thought
#Carbon #Carbon/Climate Change #Climate #Paris Agreement
France
2019-10-19
Weekly food for thought
#Credit Risk #Sovereign Debt
Europe
2019-10-19
Weekly food for thought
Global
2019-10-19
Analyst insight
Global
2019-10-19
Weekly food for thought
France
2019-10-19
Weekly food for thought
#Carbon/Climate Change #ESG
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Analyst insight
#Biodiversity #Climate #Environment #Natural Capital #Paris Agreement
Global
2019-10-19
Weekly food for thought
United States
2019-10-19
Weekly food for thought
Italy
2019-10-19
Weekly food for thought
Global
2019-10-19
Analyst insight
Middle East & North Africa
2019-10-19
Weekly food for thought
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Research note
#Carbon #Carbon/Climate Change #Climate #Paris Agreement
Global
2019-10-19
Weekly food for thought
Global
2019-10-19
Analyst insight
All
2019-10-19
Weekly food for thought
United States
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
#Carbon/Climate Change #Climate #Credit Risk
England
2019-10-19
Weekly food for thought
Global
2019-10-19
Weekly food for thought
Germany
2019-10-19
Analyst insight
Brazil
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Italia
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Canada
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Analyst insight
Sweden
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Italia
2019-10-19
Analyst insight
All
2019-10-19
Weekly food for thought
USA
2019-10-19
Analyst insight
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
United Kingdom
2019-10-19
Weekly food for thought
United Kingdom
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Research note
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Russia
2019-10-19
Analyst insight
Argentina
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
European Union
2019-10-19
Analyst insight
European Union
2019-10-19
Analyst insight
Greece
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
European Union
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Cuba
2019-10-19
Weekly food for thought
All
2019-10-19
Analyst insight
Greece
2019-10-19
Weekly food for thought
European Union
2019-10-19
Weekly food for thought
French Guyana
2019-10-19
Weekly food for thought
#Sovereign Debt
Russia
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
Venezuela
2019-10-19
Analyst insight
All
2019-10-19
Weekly food for thought
United Kingdom
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
France
2019-10-19
Weekly food for thought
European Union
2019-10-19
Weekly food for thought
All
2019-10-19
Weekly food for thought
France
2019-10-19

Let's keep in touch!

This field is required
Invalid email

Register to our newsletter to be the first to hear about ...

By submitting this form, you consent to receiving email communications from Beyond Ratings. Beyond Ratings will update your email preferences and hold your details in its contact database. For more information on how Beyond Ratings uses your data, see our Privacy Policy.

Get started

More investors are choosing Beyond Ratings' proprietary ESG-augmented financial metrics to gain a 360° view of company and country ESG performance.