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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Monday, January 07, 2008

Business of poverty: A business priority

Daily Mirror: 07/01/2008" By Sahan Kulatunga

How can the corporate sector play a more effective part in tackling poverty? Can we assume that encouraging the corporate sector to invest in low-income consumer segments results in greater access to economic development for the poor and greater tax revenues directed towards social programs?

Is it practicable to position the corporate sector as an agent in the delivery of the international Millennium Development Goals and the poverty reduction strategies of national governments? Conversely, are we right to believe that progress towards poverty reduction reinforces economic and political stability, helps markets to grow, and provides a platform for private sector development?

According to Central Bank statistics, currently around 23% of the Sri Lankan population live below the poverty line, which itself is questionable due to the mechanism used in calculating the per capita income and the actual purchasing power of an average household. Considerable variations in poverty levels can be observed across sectors and districts, which also need to be taken into consideration. There are a number of factors that have contributed to the persistence of poverty in Sri Lanka. Neither the economic growth rate nor its distributive effects during the last two decades have been sufficient to bring about a significant reduction in poverty levels in the country. Moreover, the civil war which has lasted for over 20 years has caused immense human suffering and deprivation. Low productivity in the agricultural sector, poor infrastructure facilities and limited access to basic social services in rural areas, labor market distortions and problems of governance have also contributed to the high prevalence of poverty in Sri Lanka.

In the quest for sustainable development, eliminating poverty is the key challenge facing not only the government and civil society, but also businesses. Traditionally, ‘business’ has played a crucial role in providing routes from poverty to prosperity, pursuing profit and in the process generating wealth, products and services, innovation and technical advances, jobs and tax revenues. Businesses of all sizes relate to the poor as consumers, staff, suppliers and distributors, and in some cases as neighbours. However, such a business-as-usual approach is clearly not lifting the majority of the people out of poverty: people who survive on less than US$2 per day. The formal sector barely serves the poorest of these people, who must rely on the informal sector and their own production as their main source for products, services and income. Furthermore, many of the poor are suffering from the negative impacts of business activities, from environmental pollution to human rights abuses. While the primary role of business is to provide the “engine of growth”, recognition is growing that the private sector can and should do more to combat poverty, and that this unrealized potential offers both a commercial and a social opportunity. A comprehensive approach to poverty elimination is needed, one in which public, private and voluntary sectors attack the multiple dimensions and causes of poverty.

Poverty is a multi-faceted construct, with social, cultural, economic, and political factors at play, so much so that the solution to poverty has to be equally multi-faceted, involving governments, NGOs, bilateral and multi-lateral development institutions. Curiously, the business sector has thus far neither sought a significant role in poverty reduction, nor has it been awarded one. In the past, its contributions have predominantly come under the umbrella of “Corporate Social Responsibility”, an extension of its role as a good corporate citizen. Accordingly, the involvement of the business sector in poverty alleviation has been overwhelmingly driven by a philanthropic rather than a business motive. Nonetheless, there are cases where businesses, while not setting out to address poverty issues, do reach out to the poor as customers and potentially contribute substantially to the solution of the persistent problem of poverty.

Multinationals and the Poor

The world’s multinational corporations – 63,000 of them at last count – frequently find themselves the target of criticism by the world’s anti-globalization protesters. MNCs, the protesters charge, are principally responsible for the impoverishment of many of the world’s six billion people. While global corporations have unquestionably brought greater wealth, power and opportunity to the poor world, especially China and India, according to the World Bank some two billion people still live in countries or regions that have been left behind, becoming in fact less globalized. In these places trade has diminished in relation to national income, foreign investment and economic growth have stagnated, and poverty has risen. Most Africans were better off 40 years ago. The average per capita income of Muslims – from Morocco to Bangladesh and beyond, to Indonesia and the Philippines – is half the world average. Thus, while globalization has benefited many, one-sixth of the world’s people live in what the International Finance Corporation calls “deep poverty”, as described in a 2004 speech by Peter Woicke, then IFC’s executive vice president. For example, at a recent meeting of the World Economic Forum anti-globalization protesters waved signs reading: “Our resistance is as global as your oppression”.

MNC involvement is crucial to poverty reduction for two reasons: First, the reduction of poverty depends on the growth of business, especially small, domestic businesses. And increasingly, for a local business to flourish it must have access to the world: to markets, credit, and technology, all facilitated by MNCs. The second reason is less obvious and more controversial. Poverty reduction requires systemic change, and MNCs are the world’s most efficient and sustainable engines of change. They provide political leverage with local governments, they offer opportunity for people who are convinced there is none, they motivate the young to learn and organize to gain power, and they build roads and hospitals and other infrastructure. MNC’s in developing countries are often the first choice for private sector jobs by young people, who are attracted by the higher salaries and the learning opportunities. And wise governments get the private sector to do as much spending on infrastructure as possible in order to protect their own treasuries. Many of the world’s poor live in countries where governments lack either the desire or the ability to raise living standards on their own. Financial assistance to such countries– some US$2.5 trillion has been provided in the last 50 years – has often not helped the neediest citizens. In fact, it may have worsened their plight by sustaining the corrupt or otherwise inefficient governments that contribute to their misery, by leaving nations with mountainous debt.

The way forward

In such mismanaged countries, a way must be found to change the basic system. Many multinationals have done just this, while at the same time making profits upon which their survival depends; Nestlé and Unilever in India, Coca-Cola in Venezuela, and Intel in Costa Rica are but a few examples. Their initiatives not only provide jobs and raise income levels, they also improve education and give individuals the motivation to pursue it. Education, after all, requires more than just buildings, teachers and texts. In much of the developing world, the poor lack of faith that change is possible; few believe in the existence of a social or economic ladder that, with proper education, can be used to climb out of poverty.

The success of a DaimlerChrysler project in Brazil’s poverty-stricken northeast, provides another example of a corporation changing the system to reduce poverty. In 1992, under pressure from the Green Party in Germany, DaimlerBenz, as it was then known, looked for ways to use renewable natural fibers in its automobiles. At the same time, the Brazilian government demanded that manufacturing facilities in the country increase their local content. To address both problems, the head of Daimler in Brazil arranged with POEMA, a local anti-poverty program in Belem, to construct a modern, high-tech factory that would make headrests and seats out of coco fibers from locally grown trees. As of today some 5,200 people are employed in this project. For these formerly impoverished Brazilians, life dramatically changed for the better; children attend school, people are active in local politics, and health facilities have improved. This reinforces the notion that MNCs have the unmatched power and competence to reduce global poverty. Increasingly, world opinion, as well as the inclinations of their own managers and staff, urges MNCs to use that power more effectively. A regional example is the success of Grameen Bank in developing microfinance in Bangladesh as a successful commercial operation which has led to global interest in the process. Grameen Bank totally focused on Bottom-of-the-Pyramid (BOP) customers with an average loan size of less than $20 when it started. There are more than 17,000 microfinance operations that are variants of the Grameen concept around the world, including in Sri Lanka. The microfinance revolution now has its own global conference every year.

Breaking the power

of dominant logic

A principal enemy of innovation and out of the box thinking is, cultural norms, described as the “dominant logic” of a community or organization. Dominant logic can stifle openness and receptivity to new ideas, practices and business models. Consider, for instance, the politicians and bureaucrats in India, one of the largest countries with a significant portion of the world’s poor. India is home to more than 400 million people who qualify as being very poor. The policies of the government for the first 45 years since independence from Great Britain in 1947 were based on a set of basic assumptions. Independent India started with a deep suspicion of the private sector. The country’s interaction with the East India Company and colonialism played a major part in creating this mindset. The experience with the indigenous private sector was not very positive either. The private sector was deemed exploitative of the poor. This suspicion was coupled with an enormous confidence in the government machinery to do what is “right and moral”. For example, the government of India initiated a series of large industrial projects in the public sector (owned by the Indian government) in a wide variety of industries, from steel to food distribution and global trading in essential commodities. India’s general suspicion of the private sector led to controls over its size and expansion.

The focus of public policy was on distributive justice over wealth creation. Because of the disparities in wealth and the predominance of the poor, the government thought its first priority must be policies that “equalized” wealth distribution. Taxation, limits on salaries of top managers, and other such measures were instituted to ensure distributive justice. The discussion further polarized around the somewhat contrived concepts of rural poor and urban rich. The assumption was that the rural population was primarily poor and the urban population was relatively rich. However, the data increasingly does not support this distinction. There are as many rural rich as there are urban poor. Poverty knows no such boundaries. In the developing world, more than one third of the urban population lives in shanty towns and slums. These traditional views reflect the philosophy behind actions taken by bureaucrats and politicians. During the last decade, a slow but sustainable transition has been taking place from the traditional to a more market-based outlook.

This, much-needed and desirable transition is in its infancy. The dominant logic, built over 45 years, is difficult to give up for individuals, political parties, and sections of the bureaucracy. This is the reason why politicians and bureaucrats appear to be vacillating in their positions. Most thinking people know where they have to go, but letting go of their beliefs and abandoning their “zones of comfort” and familiarity are not easy. It is equally difficult for a whole generation of BOP consumers to give up their dependence on governmental subsidies. Private-sector businesses, especially MNCs (and large local firms that emulate their MNC competitors), also suffer from a deeply etched dominant logic of their own, which restricts their ability to see a vibrant market opportunity at the BOP. We have to change our long-held beliefs about the BOP. The barrier that each group has to cross is different, but difficult nonetheless. However, once we cross the intellectual barrier, the opportunities become obvious. The BOP market represents a major engine of growth and global trade.


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