“As [political and economic] institutions influence behaviour and incentives in real life, they forge the success or failure of nations.”Daron Acemoglu & James A. Robinson, “Why Nations Fail”, 2012
However well prepared you are for long-term economic and social forces, from time to time your country will still be hit by shocks. Such shocks might be economic, such as the huge financial crisis that hit the whole of the western world in 2008, they might be political, arising from terrorism or some other new and dangerous trends in international relations, or they might even be natural, coming from earthquakes, volcanic eruptions or tsunamis, say – such as the devastating tsunami that hit many countries around the Indian Ocean in December 2004, or the one that hit the east coast of Japan in March 2011. They could even, in principle, be social and internal shocks, caused by some other wave of economic or technological change. For this reason, an important measure of how well countries are prepared for the future is their resilience – in other words, the ability of the society and its institutions to cope with shocks.
The point goes even wider than the notion of shock-absorption, taking in a country’s ability to adapt continually to changing circumstances and popular preferences. Economic and political historians now agree that “the wealth of nations”, to borrow Adam Smith’s phrase, depends on a wide set of political, social, legal and economic institutions. The Western countries represented in this 2050 Index have had such strong institutions now – providing the rule of law, well-functioning justice systems, democracy, freedom of information, clear property rights and enforceable contracts, an absence of rapid inflation, and political and social stability – for many decades, in some cases centuries. But such institutions can decay, be neglected or be undermined. And what is vital is whether or not citizens continue to trust those institutions.
Our Wake Up 2050 Index therefore begins its attempt to measure countries’ resilience by using well-established rankings of the workings of democratic institutions, and a measure – extracted from the Heritage Foundation’s “Economic Freedom Index” – of how well property rights are protected. We then added Transparency International’s survey of perceptions of levels of corruption as a proxy for the quality of the rule of law and for one form of civic trust. More controversially, we have chosen the trend of income inequality as a further proxy indicator of social trust in institutions: while different cultural and historical backgrounds certainly mean that inequality matters more in, say, France or Sweden than it does in the United States of America, the trend of income inequality matters anywhere. Even in an America tolerant of inequality, its trend over many years now has led in part to what mainstream commentators term the “political insurgencies” of Donald Trump and Bernie Sanders in the Republican and Democratic presidential primaries.
Finally, bearing in mind the consequences we saw during and after the 2008 crash, we have put in the resilience category two measures of debt: household debts as a percentage of household income, and gross government debt as a percent of GDP. Neither household debt nor government debt is in itself a source of weakness, today or in the future. But a country that receives a shock while already exhibiting high levels of either form of debt will have less room for manoeuvre in dealing with that shock than a country with lower debt levels. It will be less resilient.