Is There a Role for Corporations in Alleviating Poverty in Emerging Markets?

The need to address questions of low living standards, exploitation, poverty, unemployment and how to promote human development, in general, has been almost entirely the preserve of Governments and the UN -especially in the last decade with the emphasis on the MDGs (Millenium Development Goals). The paper will look at whether large private corporations also have a role to play to reduce poverty. This notion is also linked to the concept of corporate social responsibility. The ?role of business is business’ approach plays less well today.

So what can corporations do in the poverty area given that their main experience has been business and profit generation to-date. Should they have corporate poverty departments. Can an emphasis on poverty alleviation help a corporation to make profits? That it might be morally and ethically acceptable for corporations to be involved in poverty alleviation plays less well in the boardrooms in Dallas, Tokyo, Hong Kong and Jakarta than elsewhere. So what, if anything, could be done to change that view?

1. Introduction

Of course many argue that the business of business is simply business and hence other concerns, such as poverty, are for Governments to take care of.

This argument was powerfully stimulated over thirty years ago by the monetarist economist Milton Friedman. His oft-cited pronouncement that the social responsibility of business begins and ends with increasing profits fits in even less well today than it did then. However, this view has not disappeared as instanced by Martin Wolf the lead economist of the London Financial Times when he argued that the idea of corporate social responsibility is today more than a merely defensive one. It is positive and broadly focused, amounting to a transformation of the objectives of the company and so of the market system. He continued: ?It is not enough, in this view, for companies to pursue profits within the constraints of law and the principles of honest dealing. They are seen as having a leading role as agents of social, environmental and economic progress. Business should enthusiastically embrace and adopt the notion of ‘corporate citizenship’.”

As more and more companies adopt socially responsible policies, take on board codes of ethics, and struggle with quasi standards such as the GRI, UN Global Compact, SA8000 and the release this year of ISO26000 and now Turnbull (in the UK) on corporate governance, does this mean that corporations must now also take on board a major concern for poverty?

This is what I look at in this paper, in particular, I focus upon large scale corporations (the Trans National Corporations TNCs) who have a presence in a developing country either through a wholly owned subsidiary, a joint venture or a major supplier. Thus I do not touch upon the vast majority of private sector activity of wholly owned domestic enterprises or, indeed, the private sector as such.

2. An analytical framework

Returning to the theme of CSR and poverty, there are both supply and demand responses. The supply response is equivalent to the development response i.e. a growing and profitable company provides a supply of jobs and incomes. Consequently, to increase this supply requires specific conditions to allow the private sector to flourish. Poverty and inequality conditions in many countries lead to instability, corruption and therefore much unreliability in negotiating contracts. This leads to higher costs in doing business and a general reluctance to work and invest in poor countries. Examples abound, but Singapore, near the top of Transparency International?s corruption index, receives more than its fair share of private investment than, for instance, Pakistan that finds itself near the bottom of the index.

Thus, the assumption is that the supply of TNCs creates economic growth and employment. Large scale TNCs may provide jobs directly but the overall number of workers in these organizations is probably not more than 100million worldwide out of around 2.4 billion workers i.e. something like 4% of the world?s jobs . There may be as many people again whose jobs and livelihoods are created indirectly by the TNCs such as suppliers or simply those benefiting from the wealth created. However, it cannot be assumed that those who directly obtain jobs are those in poverty. Foreign investment is likely to attract and employ those with high skills rather than those in destitution. It is mainly the indirect effects of TNCs that will provide some benefit to the poor these include working for the suppliers of suppliers (immediate suppliers of TNCs in developing countries will also likely to be highly skilled). Of the suppliers of suppliers it will be those in small firms or those in self-employment who will number among the poor. Consequently, foreign investment via TNCs will help the poor solely or mainly through a ?trickle-down? effect. This way of doing business is unlikely to change simply because poor people are poor because they don?t have the skills necessary to help themselves out of their own poverty and, consequently, cannot provide the skills require by TNCs.

The demand response is a little more complicated. It is what is expected, or demanded, of companies so that they can operate freely. This is a bit of an oxymoron since ?expect? and ?free? are in opposition to each other. This demand is expressed through hundreds of rules and expectations. The corporate social responsibility movement is just one of many such set of expectations that run from initiatives such as the UK?s Ethical Trading Initiative, the ILO conventions and standards to legally binding ones that are enshrined in company law and that come under the headings such as corporate governance. Prominent in the demand response are the stakeholders of the organization. There is no accepted definition of who these are but they certainly include internal stakeholders such as owners, managers, shareholders and employees while the outside stakeholders, and this is more contentious, include suppliers, local communities, families, the environment (NGO community) and government. Each of these groups is expressing ?demands? on corporations with, perhaps, only the environmental group even mentioning the issue of poverty. The TNCs response to these demands can affect long-term profitability hence the increasing interest by TNCs in the various stakeholder groups.

There is also a third component related to poverty which is both supply and demand and this is when private companies develop initiatives directly aimed at the poor. In many cases this has come under the heading of ‘business partnerships’ where TNCs seek advantage through better public relations and understanding of local situations. But, normally, when one thinks of poverty alleviation, the private sector often escapes attention and the image of state-provided services is conjured. Yet the poor represent an enormous untapped resource for the private sector that has hardly been explored but much talked about in Prahalad?s ?bottom billion?.

The experience of credit programmes for the poor show that these activities are both sustainable and profitable once the initial capacity building and investment has begun. Awareness by the private sector of this untapped potential is a key role international organisations and donors play as facilitators in helping the poor to help themselves. Much effort is expended here. Once the poor have their feet on the first rung of the ladder, this development process needs to be sustained through, for example, the continuing supply of credit from the banking system. Moreover when the poor have shown their credit worthiness through various global Grameen-type credit schemes, the culture of thrift is developed and credit records can be passed on to more commercial, but not exploitative, lenders.

3. Can CSR have a positive effect on poverty?

CSR is a good thing in itself since it leads to better treatment of stakeholders from improved codes of ethics, better conditions for employees, concerns of local communities being considered and less damage to the environment etc. It also leads to increased allocations to philanthropic causes. However, the direct impact of corporations on
alleviating poverty, and remember I am talking about large TNCs and not the ?private sector?, is likely to be marginal on the supply side. This is because:

• Poor people don?t work for TNCs
• TNCs do not create many jobs ? even the largest corporations only employ about 100,000 to 200,000 compared to a world labour force of 2 to 3 billion
• Suppliers to TNCs tend to be high tech. and do not employ poor people in general

On the demand side there is more that TNCs can do such as:

• Making sure that products and production processes are safe
• Ensuring a pricing policy that poor people can afford (AIDS drugs are an obvious example)
• Respecting the environment
• Having a philanthropic policy that focuses upon anti-poverty measures
• Working with the authorities and international organizations to ensure democratic environments, peace, lack of corruption, reduced bureaucracy and anti-discrimination

In conclusion, there are a number of steps that corporations can take that will impact on reducing poverty. But, these steps are unlikely to lead to major reductions in the numbers in poverty especially as the main focus of business is business which is where their experience lies ? few within the walls of TNCs know anything about poverty alleviation programmes and, unfortunately, the rationale for TNCs to have such persons is not overwhelming. Neither do the above lists suggest that there is a lot of mileage in focusing upon anti-poverty measures with the exception of the last item above. Thus the case for a corporation to have a corporate poverty department is not strong since an emphasis on poverty alleviation is unlikely to help a corporation make profits. They may wish to do this for PR or philanthropic purposes but the direct business benefit is not high.

On the other hand, the case for TNCs to have a CSR department is much stronger. There are strong benefits across the board for each stakeholder who, in general, will not be those in poverty. Consequently, even though it is certainly morally and ethically acceptable for corporations to be involved in poverty alleviation the argument plays less well in the boardrooms in New York, Tokyo, Hong Kong, Shanghai or Delhi simply because the impact on profits is marginal.

Labour market rigidities

A key economic concern is whether corporations that take on board ‘ethical trading initiatives’, ‘core labour standards’, ‘stakeholder consultation’ or even full-fledged CSR in their dealings in developing countries, will find themselves disadvantaged because they have become ‘uncompetitive’. As Wolf noted:

“?to the extent that companies feel obliged to operate with the same environmental standards and terms and conditions of employment worldwide, they are likely to harm the development of poorer countries, by ignoring the proper differences that operate in favour of less economically advanced countries. Similarly, to the extent that companies accept excessively costly operating practices, they are likely to be less competitive and less profitable, and so make a smaller contribution to the economy.”

If Wolf is correct then increasing levels of CSR in the operations of corporations in developing countries will lead to worsening levels of competitiveness, thereby less growth and increasing poverty.

This is the subject of an article by Ethan Kapstein of INSEAD when he states :

“Consider the linkage of labor and environmental standards to multilateral trade agreements. Improving working conditions and air and water quality are laudable goals, and firms should do so whenever it is economically and technically feasible. NGOs can usefully contribute to that process by providing governments and firms with information, advice, and policy alternatives. But forcing the standards of industrialized nations on developing countries and the firms that operate in them could backfire by reducing investment and job creation. More workers would be chased into the informal economy, which has even lower standards, if any at all.”

On the issue of global standards, I agree with Henderson when he says: “The effects of enforced stringency and uniformity are especially damaging in labour markets. Regulations made in the name of ‘social justice’ or ‘positive’ human rights, whether by governments or businesses, can undermine freedom of contract and thus deprive people of opportunities. Those who suffer most from such actions are often the worst off.” I am very much in favour of labour flexibility in labour markets.

In fact the cost of labour often becomes above its market price through market imperfections or, through Government intervention to put in place, for example, minimum wages. In the Philippines, for instance, minimum wages are above the market wage which has both positive and negative impacts. CSR proponents have not discussed this issue, although the issue has been widely discussed outside of that arena. Clearly, CSR companies cannot dish out wages above market wages for all the negative effects that that implies. However, over time it is key to push up labour productivity in developing countries so as to pay higher wages and thereby increase effective demand. Keynes was also aware of the problems of inflation but, like myself, would not have had economic policy totally dominated by interest rate and inflation considerations.

Although apparently self-evident, why is it important to look at labor productivity within and across countries? It is commonly accepted that under liberalization there will be a tendency for wages to match marginal productivity of output. Now labor productivity and wages will be higher in one country than another. It is absurd to reduce all wages to the lowest common denominator so that domestic markets can clear to reach full employment while each country competes to be the lowest wage producer. What will happen is that labor productivity will tend to reflect relative factor endowments across countries. Moreover, those countries further up the technological frontier due to investments either in technology or human resources or a combination of both, will have higher labor productivity and, consequently, higher wages. Thus high relative wages are not a problem in itself. But if wages, and therefore labor costs, are higher than that expected by marginal productivity considerations for a given factor endowment then that country will become uncompetitive and exports as well as employment will suffer.
What can happen ? the case of GAP What happens when activists take it upon themselves to force the issue of higher wages in developing countries? One of the most famous cases is that of the clothing retailer Gap,6 which was among the first enterprises in the US to draw up a code of ethics. Gap bought in clothes from the Mandarin International Apparel Factory situated in the San Marcos free trade zone of El Salvador. It came to international prominence when a number of workers in Man?darin, an independent supplier to Gap, were dismissed for trying to set up a trade union in response to poor working conditions more than 12 hours of work a day, overcrowded and overheated premises, coercive measures and very low wages, about $0.56 per hour. The National Labor Committee (NLC) of the US sounded an alarm and, although Gap was not the only enterprise working with Mandarin, the NLC focused pressure on the company. Because Gap was well known for living up to its public image, it became a target of the NLC campaign. Arguably, a company with a poorer image would have been less of a target, but then would not reap the benefits of a positive consumer reaction.

With these resolutions and the establishment of the independent monitoring group, Gap has gone further than other US TNCs, which have developed codes of ethics but have not authorised an independent monitoring of their application. This agreement could provide a model for socially responsible enterprises, at least for their dealings with third parties. It also illustrates that the application of socially responsible principles is not pie in the sky, and that one major company and there are many is putting social responsibility for both itself and its contractors on a par with profit maximization.

That Gap will enhance both its public image and, consequently, its eventual profitability is something that may be expected.

References

1. www.mhcinternational.com
2. Friedman, Milton. “The Social Responsibility of Business is to Increase Its Profit.” New York Times Magazine (Sep. 13, 1970), 32-33, 122-126.
3. Martin Wolf: “Sleep-walking with the enemy: Corporate social responsibility distorts the market by deflecting business from its primary role of profit generation”, Financial Times; May 16, 2001.
4. Assuming there are around 1000 TNCs with 100,000 employees on average gives 100million employees or about 4% of the world labour force. With a world population of 6.5 billion and assuming about 40% are in the labour force gives 2.6billion workers.
5. Ethan B. Kapstein: “The Corporate Ethics Crusade” by Ethan B. Kapstein, Foreign Affairs, September/October 2001
6. David Henderson: “Misguided Virtue:False Notions of Corporate Social Responsibility”, March 2001, IEA (Institute for Economic Affairs), London, UK.

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