Developing a country's sustainability indicator: An analysis of the effect on trade openness

Several proposals have been put forward for measuring sustainability performance at the country-level, in addition to the considerable debate surrounding which pillars (or dimensions) should form part of this sustainability and which variables should make up these pillars. To date, no clear consensus has been reached regarding which sustainability measures are the most appropriate when seeking to reflect not only a country's economic development but also its environmental, social, and governance aspects. To provide an alternative to the existing indicators developed by private agencies, this study proposes an index to measure sustainability at the country-level, considering the Environmental, Social and Governance (ESG) pillars. In addition, this indicator will serve as a counterpoint to the majority of current sustainability indicators, some of which involve a strong component in per capita income, or which are over-represented in economic terms. In a second stage –and in order to apply the indicator– this study analyses how sustainability at the country-level, and its ESG pillars, influence trade openness through a study of panel data from 47 countries. The results indicate that applying a disaggregated index in its dimensions (pillars) shows both the positive and negative effects that sustainability can have on the variable studied. A non-disaggregated index only reflects the joint effect, which might be insignificant in certain cases. This study contributes to the existing literature as well as to current understanding of how to measure national sustainability and its implications for macroeconomic variables, and it also provides a clear method for future research.