| |
Contributions from
the Column
InWEnt News
Renewables: steps towards a people’s university
Poverty reduction: incentives for the private sector
05/2005 |
|
[ Poverty reduction ]
Incentives for the private sector
Private-sector engagement is vital if the international community is to achieve the United Nations' Millennium Development Goals (MDGs). Companies have become main actors in defining international rules and structures. For economic reasons, they need to display a sense of corporate social responsibility.
[ By Jochen Weikert ]
Relationships in the global marketplace have undergone a radical transformation over the last two decades. State actors like governments and parliaments have gradually withdrawn from the domains of finance, trade and industry. Supranational regimes like the WTO have been able or willing to fill only part of the resulting vacuum. At the same time, the power and influence of private corporations has increased. They direct global investment flows and put their stamp on international structures. The crucial question is: where and how do they fit in the overall scheme of global governance?
The close links that exist between development and the global market can be clearly seen from the advances made in South-East and East Asia. The private sector has been a major motor there – and appreciation of that fact is reflected in both the Global Compact launched in 1999 by UN Secretary-General Kofi Annan and the Millennium Declaration which he sought and won from governments the following year. That declaration promises to meet quantitative targets by 2015 in fighting hunger, in securing the right to education and health, in promoting gender equality and in ensuring environmental sustainability and equality of economic opportunity.
The man heading the UN millennium project, Jeffrey Sachs, divides MDGs into those which are directly concerned with income formation (income MDGs) and those which are not (non-income MDGs). In regard to the private sector, the key question is: What interest should companies have in creating incomes in the less developed parts of the world? And how can they be involved in pro-poor-growth strategies?
What helps here is a look back at the development of advanced societies. In the national markets of the past, producers of consumer goods had an interest in developing mass purchasing power so they could sell their products. That “Fordist” constellation of interests exists where production and product sales occur within the same economic sphere. Companies then need adequately large markets and take account of that interest in wage negotiations.
Today, as a result of outsourcing, many consumer goods are made in countries with a high incidence of poverty. A growing proportion of global mass production finds buyers in emerging markets rather than in the saturated (and sometimes shrinking) markets of the industrialised world. Most of tomorrow's consumers will live in today's developing and newly industrialised countries. Nevertheless, market development strategies are not much of a source of motivation for corporate commitment to MDGs.
Since the 1992 Rio Conference at the latest, it has also been clear that the globalisation of rich-world patterns of consumption would be environmentally unacceptable. Climatic consequences alone place limits on pro-poor-growth. And there is another restriction: in D+C/E+Z (2005: 4, 166/167), Jeffrey Sachs pointed out that the attainment of “non-income MDGs” is a pre-requisite for private-sector investment. Such “public goods” (health, education) are not furnished by private actors. But even the public sectors of developing countries cannot achieve the non-income MDGs alone, Sachs claims. They can only be realised if donor countries honour their financial pledges of setting aside 0.7 percent of gross national income for international development cooperation.
Self-serving altruism
Whether that is a realistic expectation remains to be seen. In the light of past experience, it seems unlikely. So it is all the more important for companies to lend their weight to the pursuit of UN non-income goals, even if there is no direct link with their business activities. The question here is basically one of corporate social responsibility: Is it allowed, encouraged or required for companies to pump their shareholders' resources into activities which will not yield short-term profits?
When the Economist asserted at the beginning of the year that the answer to that question was “no” (“The good Company”, January 22), it drew uncomprehending letters from readers (executives of multinational companies among them). While the Economist sided with Adam Smith – and his argument that the prosperity of society is automatically boosted by the butcher, brewer and baker looking to their own self-interest – responding readers expressed doubt that the conditions of economic life in the 18th century held answers for today's complex world.
Georg Kell, the executive head of the Global Compact office, made the point that issues which were once considered “soft” – such as those raised by the concept of corporate social responsibility (CSR) – are now an integral part of sound risk management. Underpinning Kell's argument is the importance attached by major brand manufacturers to the matter of social standards in their global value-added chains. Under pressure from a sensitised public, they adopt voluntary codes of practice and attempt to lend them credibility and extend them sector-wide. That calls for lots of manpower, money and organisational resources and does not directly generate profit. If such activities were to cease, however, scandals could decimate the value of an expensively established brand overnight.
Corporate involvement in the provision of public goods takes place in a strategically important economic area
– because companies' activities are dependent on public goods such as legal institutions, markets and infrastructures,
– where the public sector fails to provide such goods,
– where corporate commitment after deduction of costs still generates a profit,
– and/or the cost of a loss of brand value, market presence and financial market confidence are even higher.
The fact that it makes sense for companies to commit to non-income MDGs is evident in many areas of everyday life. It takes a minimum of education for people to become addressable consumers. Advertising needs to be read. And companies can only recruit employees who possess certain skills. Conversely, people only become consumers with significant purchasing potential where their skills are developed and valorised.
It is a similar story with health. A company that finances school milk programmes helps combat childhood malnutrition. One that provides mosquito nets free of charge or at cost price helps curb disease. That kind of action removes obstacles to economic development and paves the way for markets which first yield revenues for the companies already present.
Such private-sector activities can also promote another millennium goal: gender equality. In societies which undermine the productivity of women by systematic discrimination in education and health care, half of the potential workforce is unused. In addition, social commitment helps spread brand awareness and improves a company's image. Nascent mass consumption in major middle-income countries points to the advantages that positive action brings (see VW in Brazil and China). On the other hand, there are certainly risks inherent in such engagement. Companies themselves see a danger of their shareholders failing to back social strategies because they are still regarded as “soft” issues in the world of finance. Whether measures motivated by private-sector interest are sustainable is often a moot point.
Nor should it be forgotten that the engagement of outside companies does not take place in an economic vacuum. It must always be ensured that small and medium-scale local enterprises (often informal set-ups) are included in the global value-added chains. What cannot be ruled out, however, is that the greater operational and cost efficiency of transnational corporate groups may squeeze local SMEs – which are key income-forming businesses – out of the market. And finally, publicly legitimised structures must not be superseded by private-sector activities driven by self-interest, especially in basic service sectors such as education and health care.
In the long term, the provision of public goods can only be effected by a democratically legitimised regime geared to the interests of society as a whole. With both production and consumption now global, that regime will also have to be global. First moves have already been made, e.g. in climate and trade agreements. Until the transition phase is over, plenty of space and incentives should be provided for private-sector engagement.
Jochen Weikert
is with InWEnt's “Business Development and Infrastructure” unit. The issues raised here will be discussed at InWEnts 10th International Economic Forum “Business and the Millennium Development Goals: An Active Role for Globally Responsible Companies”, which will be staged in New York to coincide with the UN Millennium+5 Summit in September. jochen.weikert@inwent.org
|
