World Poverty and the Private Sector

By Jane Nelson

In today’s global economy there are few topics that are as complex or controversial as the relationship between world poverty and the private sector. Depending on the issues, the location and the commentators, private enterprises – especially multinational companies – tend to be seen as either saviors or villains in the fight against poverty. On the one hand, capitalism and the enterprises and entrepreneurs that drive it offer one of our greatest hopes for creating wealth, funding innovation, encouraging competitiveness and transferring the technologies that can support sustainable livelihoods and lift millions of people out of poverty.

On the other hand, unfettered economic liberalization and privatization can destroy local livelihoods, industries and ecosystems, and exacerbate poverty and inequality. This is especially the case when they occur in the absence of good governance systems, effective legal frameworks and social safety nets. The challenge for the private sector is to work in partnership with governments and civil society organizations to minimize the costs of globalization and spread its benefits as widely and fairly as possible.

As United Nations Secretary-General, Kofi Annan, commented to business leaders at a recent World Economic Forum (WEF) meeting, “If we cannot make globalization work for all, in the end it will work for none... the fragility of globalization poses a direct challenge to the self interest of the corporate sector, and a central part of the solution is the need for you to accept the obligations – not merely the opportunities – of global citizenship.”

In response to this and other challenges the WEF has been one of a growing number of business leadership networks that has established an initiative on Global Corporate Citizenship.There is a growing ‘business case’ for corporate engagement in poverty alleviation. In part this is based on investing in the stability of current markets and securing the prosperity of future markets, many of which are likely to be in developing countries.

In his foreword to the publication Tomorrow’s Markets, competitiveness guru Michael Porter argues, “Not only can corporate and social needs be integrated, but the success of the developing world in improving prosperity is of fundamental strategic importance to almost every company.” The business case is also driven by the growth in social and environmental activism, combined with the increased global awareness and sophistication of consumers, investors and future employees. These trends are making it imperative for companies to understand and manage their wider impacts on society. Failure to do so can increase a company’s risks, damage its reputation, limit its innovation and undermine its stakeholder relationships. These intangible assets are an increasingly important component of shareholder value and no company can afford to ignore them.

There is also a growing ‘development case’ for corporate involvement in poverty alleviation. Policy makers and non-governmental organizations (NGOs) are recognizing that private-sector resources, competencies and networks can play a crucial role in helping to address some of the world’s most complex challenges. While some would rather stop the process of globalization altogether, for most NGOs, trade unions and political leaders the challenge is increasingly how to make it more equitable and environmentally sustainable. This includes a more proactive role for private trade and investment, within a global system of fair rules and shared values.

So what practical and realistic role can the private sector play in helping to tackle poverty? Business can make a contribution in three main ways.

• First and foremost, through increased investment and the responsible implementation of core business activities, aiming to minimize any negative impacts and optimize positive contributions.
• Second, through poverty-focused social investment and philanthropy programmes.
• Third, through getting engaged in public policy dialogues and institution-building aimed at creating a better enabling environment for both profitable business and poverty alleviation.

By far and away the greatest contribution that domestic and foreign companies can make to poverty alleviation is through increased private investment and through concerted and transparent efforts to ensure that the economic, social and environmental impacts of this investment are positive. Philanthropic donations of funds, products and volunteers can make an important contribution, but these will always be small relative to the responsible application of a company’s core competencies, comparative advantages, and investment and operating expertise.

There is a growing number of inspiring examples where companies are developing innovative partnerships in all of these areas of action. These range in scale from global programmes to address cross-boundary issues such as climate change and fair trade, to local projects focused on poverty issues as simple, but important, as providing loans to support micro enterprises, supplying mosquito nets to prevent malaria and encouraging hand-washing to combat diarrhoeal disease. They include collective initiatives such as the United Nations Global Compact, the Global Alliance for Vaccines and Immunization, the Global Business Council on HIV/AIDS, the Forestry Stewardship Council and the Ethical Trading Initiative. They also include a growing variety of new products, services and community-investment mechanisms provided by individual companies in individual countries and communities.

In some of the world’s poorest rural and urban communities, large energy, infrastructure, information technology, pharmaceutical and financial companies are embarking on new partnerships to increase access to clean water, sanitation, energy, health care, technology and credit. Sometimes these partnerships are based on philanthropic contributions from business. In some cases they are a reaction to an activist campaign against the company or industry.

In a growing number of cases, however, they are examples of corporate innovation, resulting in commercially viable products, services and even new business models. Stu Hart and C K Prahalad6, for example, have undertaken ground-breaking research on business strategies for reaching the 4 billion people who live at what they have termed ‘the bottom of the world’s economic pyramid’. They offer compelling evidence on how companies ranging from local firms in developing countries, to multinational corporations such as Unilever, Citigroup, DuPont, Hewlett Packard, and Avon, are creating new business models and service offerings to reach the world’s poor.

While these voluntary initiatives will be insufficient on their own, they are a crucial step towards tackling poverty if combined with sound basic regulations and market mechanisms.

Another way of looking at the potential contribution of business to poverty alleviation is to focus on what companies can offer at the local, national and global level in terms of addressing some of the key obstacles to equitable wealth creation and distribution.

• First, at the micro-economic local level – the level where poor people live and try to develop sustainable livelihoods to support themselves, their families and their communities.
• Second, at the macro-economic national level, there is a need to create an enabling environment for private-sector development and responsible business practices.
• Third, at the macro-economic global level, there is an urgent need for ongoing international dialogue and reform to build a more open, but fair, stable and rules-based global economy.

Summary

The private sector faces increased opportunities and challenges to help alleviate poverty, driven by a combination of market pressures, changing societal expectations and government requirements. Success will depend on business being able to create both shareholder value and wider societal value, and demonstrate that it is doing so. In the 10 years since the Rio Earth Summit the private sector has made great progress. In particular, leading companies and business associations have started the following transitions:

• From laggards to leaders – instead of simply reacting to regulations and confrontational activists, some of the world’s major companies are starting to take a more proactive, solutions-oriented approach to address the intertwined challenges of sustainable development and poverty alleviation;
• From compliance to creating value – linked to this, they are moving beyond a compliance and risk-minimization mindset, to a value-creation mindset when it comes to addressing wider socio-economic and environmental issues;
• From assertion to accountability – they are recognizing the need to move from ‘one-way’ public relations exercises, to more transparent and open engagement with stakeholders, ranging from shareholders to NGOs and local communities. A key element of this is greater public disclosure and accountability for social and environmental, as well as financial performance;
• From paternalism to partnership – leading companies are recognizing that they do not have all the necessary answers, competencies or resources, even when it comes to their core business activities. They are starting to develop new types of partnership, not only with other companies, but increasingly with non-traditional allies such as NGOs.
  

There is undoubtedly room for improvement in all of these areas and a need to ‘move beyond the usual suspects’ to engage many more companies from developed and developing economies. At the same time, there can be little doubt that the creativity, ingenuity and outreach of private enterprise have the potential to play a crucial role in poverty alleviation. This can best be achieved in partnership with governments and civil society, operating within a framework of clear and fair rules and shared values.