VOLUME XIII, No. 2 - Essay

THE TURN OF THE CONCEPTUAL BASE
OF SUSTAINABLE DEVELOPMENT

October 6, 2022

New Dimensions in Efficiency
Part II

INTRODUCTION

Sustainable development encompasses three dimensions of welfare—economic, environmental, and social issues—that involve complex synergies and trade-offs. The social dimension emphasizes the importance of well-functioning labour markets and high employment, of adaptation to major demographic changes such as ageing population, equity considerations, and a willingness to participate in more effective decision-making. As such, the environmental dimension focuses on the stability of biological and physical systems, and on preserving access to a healthy environment. These requirements are recognized to be as important as economic growth and efficiency.

The three initial dimensions appear to be an indispensable basis for sustainable development; however, they cannot be sufficient in light of the growing complexity of recent sustainable development issues and new, related challenges. Therefore, it is necessary to increase the number of the dimensions, the supporting pillars in the Future House of Sustainability. Suggestions for such dimensions include finance, culture, and territory.

1. THE FINANCIAL DIMENSION

We know how important a well-functioning financial system is for everyday life and for the economy. As such, an additional dimension—the fourth one—must be the financial pillar. It is especially important to include it in any process of sustainable development because recent experience has vividly shown that the economy often causes disruption in society if the financial system is not working properly. A good example of this could be the global economic crisis between 2008 and 2009. It began as a financial crisis and spiralled into a broader economic and social downturn. The experience of such economic events suggests that at the micro level households and companies—and at the macro level entire national economies—may come close to or even cross the threshold of bankruptcy, potentially reversing the work of many years or even a decade. Furthermore, experience indicates that the financial sector is strongly pro-cyclical, meaning that it strengthens economic recovery with ample funding, but also deepens recessions by tightening lending processes.¹

Another challenge in terms of public finances is that the situation today is very tense. Public budget deficits have risen far above the acceptable level. At the same time, public debt has also reached a very high level. Their correction is now extremely important, and is a major challenge for society as a whole. Also, new waves of inflation and the monetary policy changes of central banks are having an unexpected impact on the global economy.

There is also another so-called technical, technological development and challenge on the financial front: digitalization. In fact, digitalization assumes and requires a major innovation programme for the financial sector and financial activities in the future. Hence, that is another major reason to emphasize the role of finance.

Taking into account all the above-mentioned changes and challenges, the financial sustainability pillar of the Hungarian National Bank assesses the area in eight sub-pillars as described briefly below.² It should be taken as a best practice for building these pillars.

1.1. The Banking System

In both developed and developing economies, the banking sector is the main intermediary for financial resources and assets, and its sustainable functioning is key to the balanced development of the economy. The loan-to-deposit ratio shows the extent to which lending demand in a country can be financed by bank deposits. A persistent and high ratio above 100 per cent reflects either special financing features (mortgage bond financing, a high share of central bank refinancing) or a high level of interbank and external liabilities.

Adequate capitalization of the banking sector contributes to its lending capacity and also increases its shock-absorbing capacity. However, the assessment of capital adequacy also depends on the portfolio quality, as a high share of nonperforming loans increases the risk of future capital erosion. The sustainable growth of the banking sector also depends on the efficiency of its operations.

1.2. Finances of Households

There is a relationship between higher economic development and financial intermediation: higher economic development deepens financial intermediation, but without lending, higher development cannot be achieved in the long run.

The method of calculating the interest on loans is also important for households’ financial sustainability, as the disbursement of variable-rate loans increase households’ interest-rate risks, which can lead to a rise in the debt-to-income ratio when interest rates increase. However, in addition to debts, it is also important to consider net financial wealth when assessing the financial sustainability of households, as it is an indicator of the extent to which households’ financial assets exceed loans, as a high value of net financial wealth indicates the sound and sustainable financial position of households.

1.3. Corporate Finances

Showcasing Hungary as an example, credit institutions’ outstanding lending to corporations reached 17 per cent of GDP at the end of 2019, which cannot be deemed high by international standards. The credit penetration rate largely followed a steady downward trend, due to the deleveraging of the corporate and banking sector after the 2008 financial crisis. In Hungary, the leverage ratio of companies (the proportion of debt to shareholders’ equity) steadily declined from the 80 per cent registered during the global crisis of 2008–2009 to close to 40 per cent by 2019. The return on equity (ROE) of corporations shows companies’ income-generating capacity, and it can be a measure of the ability of a corporation to raise capital, as well as of its potential undervaluation or overvaluation.

Small- and medium-sized enterprises play a significant role in the economy, especially in the labour market. Within the corporate segment, sustainable financing for small- and medium-sized enterprises is therefore of key importance.

1.4. Public Finances

The sustainability of fiscal policy should be assessed in the short, medium, and long term, and is most often characterized by public debt-to-GDP ratio and by indicators describing its change and structure. The public debt ratio incorporates the impact of, among other things, the primary balance, government interest expenditure, inflation, the exchange rate, and real economic growth, and is therefore an important measure of the effectiveness of economic policy measures.

Besides the level of public debt, its structure also affects macro-financial vulnerability or stability. One important indicator of the structure of public debt, and thus also of the sustainability of debt, is average residual maturity, which reflects the rollover risk of public debt. The ownership structure of public debt is also a key indicator of debt sustainability, and one that is closely monitored by the market. Moreover, the long-term sustainability of public finances will be challenged by an ageing population, which will also have an impact on social security systems.

1.5. Stability of Macrofinances

The financial sustainability of the national economy can be assessed by examining the macroeconomic and financial market balance, for which the availability and stability of the resources that finance economic growth (resource availability), creditworthiness, and resilience to external shocks are all important aspects. The current account balance shows the extent to which the economy’s external current expenditure is covered by foreign income. External vulnerability, i.e. the sufficiency of foreign exchange reserves, is also a key factor for credit rating agencies when it comes to assessing the debt servicing ability and solvency of the economy.

1.6. Digital Financial Services

Rapid technological development entails the major penetration of digital innovations. The sustainability of financial services therefore also requires support for the penetration of online product and service delivery, as well as the development of institutional operations and supporting infrastructure, driven by the rise of innovative financial technology firms. In the context of the digital development of financial services, online opportunities should be examined in terms of the different types of services and access channels, on the one hand, and the penetration of digital transaction methods, on the other.

1.7. Electronic Payment Services

In many ways, electronic payment services that meet the needs of consumers in the twenty-first century are of a public-utility nature, and essential to everyday life. In addition, the modern payment infrastructure has a significant impact on the shaping of economic processes. It plays a positive role in the reduction of the shadow economy, associated tax evasion, and high social costs associated with cash use. Moreover, the development and usage rates of electronic payment services are clearly correlated with rates of economic growth, which is a key factor for sustainable convergence in the long term.

1.8. Green Finance

The green finance sub-pillar seeks to ensure that the central bank’s financial position supports environmental sustainability. This entails ensuring that both fiscal policies and the financial markets are committed to financing and greening of the economy. Regarding the financial markets, one of the best-known and most widely used green financial instruments at the global level is the green bond. The proportion of such bonds issued compared to other bonds is, therefore, an important indicator. The commitment of the government and the central bank to sustainability projects that focus on the further growth in green bond issuance might be expected in the coming years.

2. THE CULTURAL DIMENSION

2.1. The Motivation of People and Institutions to Attain Culture of Higher Level

The second new dimension of sustainability is the pillar of culture. In this context however, culture should not be interpreted in a narrow sense, but in conjunction with social and moral values. ³ If we do not sufficiently meet cultural requirements when creating and researching sustainable development, then we cannot meet the growing challenges of the modern age.

At present, in this context, we can find only brief references to culture in the international literature. We read everywhere that there is a need to address issues such as the problem of cultural differences and gender equality, and that traditional societies must be able to meet the challenges of our age in order to survive, etc. In fact, however, culture is not sufficiently addressed even in the UN’s 2030 Agenda for Sustainable Development. It appears in two respects only: primary school education and gender equality. Nevertheless, this agenda is extremely useful, and a great step forward, as it highlights the importance of sustainable development in terms of political and international life. However, culture must be understood in such a way that it can also be embedded in our day-to-day activities. Conversely, we should promote the rise of cultured, highly qualified, creative individuals rather than ‘members of the herd’ to a greater extent than has been the case so far.

To attain such requirements, there is a need to briefly define theconcept of ‘culture’ as the following: the image of the human person, a way of life and thinking, a comprehensive worldview, identity, self-consciousness, psychological structure, mentality, attitudes, ethics, honesty, credibility, diligence, endurance, a social propensity to trust and cooperation, organizational management and culture, and secular or religious values and norms exposed to the challenges of mass societies and global communication.⁴ In a broader sense, three shells around this cultural core (set of characteristics) can be considered as change-generators.

Socio-economic factors – demographic trends; urbanization; social mobility; economic competitiveness and labour markets; an economy based on serving the public interest; a culture-based economy; integrity; competition for knowledge and information (Fast Data instead of Big Data); a substantially new financial system; the digitalization of money; management of human and social capital; education; health care; sports and time structures.
Science and technology – changes in the natural and human world; the role of work as the basis of human life; changes in the nature of human work (due to artificial intelligence and robotization, etc.); space research; the information revolution; and new measurement systems.
Ecology and geopolitics – geofusion: a new multi-centred geopolitical world order; climate change; the availability of natural resources; communication and interconnectedness; the tendencies of the political community.⁵

Following this approach, the culture (and its characteristics) should be considered and researched as part of the process of sustainable development. On the one hand, indicators provide information on the cultural core changes triggered by the three change-generators, and on the other hand, the impact of the core changes on the achievement of sustainable development goals.

From a practical point of view, the complex system of cultural interaction might be illustrated by the cases of income and wealth inequalities, qualification, and the barriers to cultural sustainability. Inequality is closely linked to the issues of economic growth and sustainability. Indeed, one of the keys to sustainable growth is to ensure that the benefits of economic growth are shared by broad classes in the society. Inequality is a natural feature of a market economy, but excessive levels of inequality can undermine social cohesion, mobility, and productivity, and have a negative impact on technological development, thereby jeopardizing the sustainability and inclusiveness of economic growth and convergence. By contrast, relatively moderate inequalities are less likely to generate social conflicts and help to increase social mobility and labour productivity, which are fundamental bases for long-term economic and social development and successful convergence.

As for qualifications, the presence of a skilled workforce is a prerequisite for sustainable convergence and for achieving an innovation-driven growth model. International education surveys show that although in many countries students attain adequate proficiency within the required curriculum, they are unable to effectively apply that knowledge in real-life situations. This means that in addition to the necessary basic skills, the education system needs to place greater emphasis on developing modern (foreign language and digital) skills to enable students to meet the rapidly changing demands of the labour market later on.

Digital tools are forecast to become ever more important in the labour market and in everyday life in the future, so it is important that the population is encouraged to see it as a key issue within education systems. However, a large proportion of the population aged sixteen and above does not have basic digital skills, which is a significant competitive disadvantage.

In order to meet the challenges of the twenty-first century as effectively as possible, the number of graduates in higher education, and in particular in science, technology, engineering and mathematics (STEM) subjects, should be increased in many countries. In addition, particular attention should be paid to increasing the number of graduates in IT, in order to accelerate the improving trend of recent years.

Among the frequently encountered barriers to cultural sustainability, the following may be listed:

A focus on economic growth has led to improved societal wellbeing.
Environmental protection and sustainable development are seen as equally important.
For many people, there is no substitute for property ownership.
Many people hold the view that the development of science and technology will suffice to solve all the problems in the world. However, these problems are actually rooted in breaches of ethical values.
Fragmented views on education mean that knowledge cannot be taught in a consistent manner worldwide.
Legal and economic regulations are incapable of ameliorating or solving large, complex sustainability problems.
Public institutions often have overlapping responsibilities, coordination between them is unsatisfactory, and their integrity is therefore impaired.

2.2. Suggested Approaches to Achieve the Goals of the Cultural Pillar

It is not enough to imagine something, but to imagine it in such a way that it can be realized. Such a need and set of requirements can be met through the approach and methodology of integrity. ⁶ What is integrity? It is a human, personal, and institutional attitude—referring to public and business institutions—where the existing legislation as well as the ethical and moral norms are respected. Integrity has so far performed very well, proving its worth in fighting against corruption in many countries. In Hungary, the government programme of the anti-corruption effort, which has been in place since 2012, is based on the integrity approach.⁷ We believe that it is worthwhile and promising to extend this methodology to a broader concept of sustainable development.

What are the main characteristics of the integrity approach?

First, consistent and coherent principles and values are elaborated. Integrity comes from the Latin word integer, and the original meaning of this word is inviolable, whole, harmonious, and complete in terms of its content. Now, if we put such an approach at the centre, sustainable development can easily arise in our minds as a priority. In this chain of thought, one must be thinking of a truly comprehensive, holistic concept of systems. Everything must be included—not only a segment, but also society, economy, environment, and we could also add finance, culture, and territory.
Second, decision-makers must show professional integrity and responsibility. Indeed, integrity requires that decision-makers have a high level of knowledge in their field and take responsibility for it. Therefore, we might assume an increase in social trust among decision-makers. The other characteristic of this argument is that professionalism in this field is accompanied by a great commitment to the public good and interest.
Third, integrity must be deepened morally. For this reason, it is particularly crucial that the connection between integrity and morality makes it possible to distinguish between good and bad. Integrity does not mean imposing any new moral and legal values or rules. It aims to put the existing values and rules into action, into human activity, individually, as well as in organizational and institutional terms. Consequently, it imposes moral requirements on people, based on which they can choose to act accordingly.
Fourth, organizational values and functions are being identified. It is very important here to strengthen the organizational culture at corporate, institutional, and national levels as well. How can they work more efficiently together? How can they incorporate different strategic goals? How integrated are the strategic goals in a public institution or in a private company? To what extent do tactical, concrete, short-term decisions serve the achievement of these strategic goals? In terms of organizational culture, it is also critical to explore whether there is proper communication within the given institution.
Fifth, integrity policies and programmes must be implemented. What characterizes the social policy agendas of today? The general complaint is that the programmes adopted by governments and international organizations are not being implemented. Is that because the goals are inadequate? It is possible. The other possibility is that the goals are adequate, but the implementation is not. This is a substantial international debate today. To sum up the international experience, it could be said that there are four main reasons why the goals of governments and international organizations are not being achieved. The first is that expectations were overly optimistic when the programmes were compiled. The second argument is that implementation is fragmented, or managed in an unorganized way, and that organizational cohesion is lacking. The third is that there was, in fact, no effective cooperation between the parties during the decision-making process that preceded the settlement. The fourth reason why these programmes show such poor performance is that policy cycles are split. Often a programme has begun but, in the meantime, for example, in two or three cases the composition of the government has changed, and then the programme has to be adjusted according to the new governmental agenda, which might not consider its implementation as important or interesting as the former authorities did.

These are extremely important arguments which show that integrity is closely related to sustainable development. After all, the sustainable development programme is the most notable programme in the world today. Whether it stays for a few more years, or until the end of time. The question is whether the integrity approach is going to be able to enhance the effectiveness of sustainability policies. Experience tells us that it will. Firstly, because the establishment of consistency and coherence has proved to be efficient in terms of integrity. Organizational management and culture are extremely important, due to the involvement of all the stakeholders in sustainable development programmes. Accordingly, the widest possible social change-generators and social groups must be involved. If these are included, then the organizational (institutional) culture should be considered as a vital, indispensable factor.

2.3. Special Recommendations

In order to support the function of the cultural dimension, three additional tasks need to be solved. As a starting point, the development of a new, long-term economic theory is necessary for sustainable development. Therefore, economics is in need of wholesale renewal.⁸

As our second task, we need an intellectual revolution. György Matolcsy has repeatedly stressed this in recent years, highlighting the need for two basic principles in the context of the intellectual revolution: to expand sustainability and to build on the principle of life.

Thirdly, it is important to discover cultural, ethical values and standards widely and respectfully, since without raising the quality of our culture, we cannot resolve issues to meet the needs of today’s society without jeopardizing future generations. Here again, we need culture. Simply put, we cannot be so selfish that our children and grandchildren must pay for our potential lack of consideration. For this reason, the cultural perspective is indispensable, as it offers a real foundation for the creation process of future generations and their wellbeing.

The other area where raising the quality of our culture appears essential is the reduction of unjustified income and wealth inequalities in society. This is the case worldwide, in both developing and developed countries, and cannot be resolved by state decisions alone.

These two problem areas are aimed at protecting the interests of future generations in terms of sustainability and the reduction of income and wealth disparities. Although they cannot be absolutely eliminated, their significant mitigation is a fundamental task.

These recommendations indicate possible directions for future development: they support the achievement of long-term sustainability, focusing—inter alia—on culture, integrity, and the creation of a substantially new financial system.⁹

Note: The proposed ‘territory dimension’ will be published in the next issue.

To be continued …

1
György Matolcsy, ‘Competitiveness as a Decisive Criterion for Sustainability’, Public Finance
Quarterly, Special Edition 2 (2020).
2
‘Sustainability Report of the Hungarian National Bank’ (MNB, 2020), www.mnb.hu/letoltes/
fenntarthatosagi-jelentes-2021-eng-0806.pdf.
3
György Kocziszky interprets culture in a similar way. See ‘Értékrend és kultúra a fenntartható
gazdasági növekedés mögött’ (Scale of Values and Culture behind Sustainable Economic Growth)
(MNB, 2022), www.mnb.hu/web/sw/static/file/hatteranyag-23.pdf.
4
See also János Csák, ‘Social Futuring – A Normative Framework in Society and Economy in
Central and Eastern Europe’, Journal of the Corvinus University of B udapest (Budapest: Akadémia
Kiadó, 2018).
5
See also János Csák, ‘Social Futuring – A Normative Framework in Society and Economy in Central and Eastern Europe’, Journal of the Corvinus University of B udapest (Budapest: Akadémia Kiadó, 2018).
6
Gusztáv Báger, ‘Az integritás szemléleti alapjai. Általános elméleti jellemzők’ (The Conceptual
Foundations of Integrity. General Theoretical Features), Belügyi Szemle (2021), https://belugyiszemle.
hu/hu/node/2494.
7
Gusztáv Báger, Korrupció (Corruption), (Akadémiai Kiadó, 2012), www.antikvarium.hu/konyv/
bager-gusztav-korrupcio-608575-0.
8
György Matolcsy, ‘Új iránytűre van szükség a közgazdaságtanban’ (A New Compass Is Needed
in Economics), növekedés.hu (2022), https://novekedes.hu/hirek/matolcsy-gyorgy-uj-iranyture-van-szukseg-a-kozgazdasagtanban.
9
See the background research programme in more detail at: BC4LS – Budapest Centre for Long-term Sustainability, 95 Theses for Long-term Sustainability – Global Debates (2021), https://bc4ls.
com/95-theses-for-long-term-sustainability/. The BC4LS was established by the John von Neumann
University and Pallas Athéné Domus Meriti Foundation.

THE TURN OF THE CONCEPTUAL BASE
OF SUSTAINABLE DEVELOPMENT

Gusztáv Báger

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THE TURN OF THE CONCEPTUAL BASEOF SUSTAINABLE DEVELOPMENT

Gusztáv Báger

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THE TURN OF THE CONCEPTUAL BASE
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