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BUSINESS AND DEVELOPMENT
 
Big business starts to scratch the surface
Alison Maitland
9/27/2005
 

          At the start of this month, as another natural disaster was unfolding in the southern US, a group of executives from companies including Abbott Laboratories, Nestlé and Standard Chartered toured parts of southern Asia devastated by last year's tsunami. Their mission was to find out how big business can best apply its skills to the long-term recovery of these regions through partnerships with people on the ground.
"This is a microcosm of the development issue," says Robert Davies, who organised the trip as head of the International Business Leaders Forum, a charity with 15 years' experience promoting corporate citizenship.
Out of the tsunami tragedy, Mr Davies hopes to create momentum for a truly effective model of private sector involvement in global development by ensuring that business donations still to be disbursed are directed in ways that make a sustainable impact. "Relief and aid are of minimal value in the long run unless you have a strategy for recovery," he says. "This would apply equally to disasters such as New Orleans. You can only achieve recovery if you can get the local communities beyond dependency."
The partnership model, in which companies work with governments and aid agencies, is already gaining ground in the development world. The United Nations is an advocate, having belatedly come to recognise the crucial role of private enterprise in reducing poverty.
"I believe development needs the technology, know how and skills of international corporations," says Kemal Dervis, new head of the UN Development Programme. "But that doesn't tend to go very deep in terms of poverty reduction and development. Small and medium enterprises have a critical role to play in creating the lion's share of employment."
In an effort to promote both, the UNDP runs a programme in which it brokers partnerships between multinational companies, government bodies, NGOs and small local enterprises. Projects in the Growing Sustainable Business programme include supplying electricity and telecommunications to poor rural areas and encouraging small farmers to cultivate natural ingredients for soap and margarine.
Mr Dervis says examples of best practice will encourage greater involvement by business in development. "There have been some pioneering efforts, but it should be scaled up in a major way."
Indeed, while some business leaders have been talking up the need for action, the role of the private sector has made few headlines this year by comparison with the enormous coverage given to aid, debt and fair trade. Mr Davies laments the fact that it is still not seen as central. "Business isn't the overall answer," he says. "But you can't solve poverty without working markets."
Partnerships are only one important way that big business can contribute to achieving the UN's Millennium Development Goals, which government leaders will review at the World Summit starting in New York today. Nor are they always successful -- they can be undermined by culture clashes, disagreement over goals or bureaucracy.
Philanthropy, the traditional form of private sector assistance, still plays a big role in supplementing government-led efforts, for example by providing seed funding for bigger investments or by donating employees' time to training projects.
Jeffrey Sachs, the Columbia University economist, is taking an innovative approach to corporate philanthropy with his launch of the Millennium Promise campaign. Big business can also use its powerful voice in advocacy, pressing governments to protect human rights or tackle corruption and thereby encouraging a stable environment in which enterprise can flourish.
A prominent example is the Extractive Industries Transparency Initiative, in which companies such as BP, Rio Tinto and Shell work alongside the UK government, NGOs and investors in pushing for publication of corporate payments and state revenues from oil, gas and mining.
At a more basic but essential level, companies can contribute by ensuring they operate ethically in emerging economies: providing decent, lasting jobs, steering clear of aggressive marketing tactics and avoiding environmental or human rights abuses that undermine development.
Many experts argue, however, that the most sustainable contribution will come from business models that seek to combine profits with poverty alleviation. The UNDP programme, for example, assumes that projects must ultimately generate profits.
Fuelling support for this view is the influential work of CK Prahalad, the US-based business professor, who argues that companies can help eradicate poverty by targeting "the fortune at the bottom of the pyramid" providing goods and services for the 4.0bn people who live on less than $2.0 a day.
Financial services companies such as Citigroup, are among those eyeing a vast potential market in developing countries, providing products indirectly through micro-finance institutions to small entrepreneurs whom commercial banks would not consider creditworthy.
However, all these initiatives combined "are only scratching the surface," according to Mr Davies. Only a minority of large companies have made development an integral part of their business strategy. They tend to be those with substantial operations or distribution chains in developing countries, giving them a vested interest in a healthy, well trained workforce and a good reputation with host governments.
What are the barriers to further investment? In Mr Davies' view, the overriding obstacle is a lack of imagination on the part of companies. Others would perhaps regard unfriendly business environments -- whether due to corruption, arbitrary bureaucracy, or an inadequately skilled workforce as bigger barriers.
The UNDP, by using partnerships to mitigate the risks of entering new markets, can help increase companies' confidence, says Jeremy Hobbs, executive director of Oxfam International. "When I have been involved in efforts to encourage business to invest in African countries, the most significant impediment seemed to be their perception of risk, much of which was unfounded."
Governments clearly bear prime responsibility for creating a climate in which local, as well as national and international business, can grow. Mr Dervis points out, for example, that small entrepreneurs operating in the informal economy can have an unfair advantage over medium-sized businesses caught by the tax net. "Lower taxes but a wider tax base must be encouraged."
There are other barriers. Consensus remains elusive over how far business should go in tackling development challenges. Some question whether unelected corporations should become involved in providing what have traditionally been government services.
At the same time, companies face scepticism from NGOs and others about their motives. One way to counter this would be better measurement of the impact of development initiatives. This is a difficult area. But the International Finance Corporation, the private sector lending arm of the World Bank, is experimenting with randomised controlled trials as the most robust way to test the effectiveness of the technical assistance it provides in tackling poverty.
The methodology could be used more widely, says Geeta Batra of the IFC. "In the absence of metrics, you can tell all the stories you want. But when it's backed by good numbers, it's a stronger message."
Some argue that business could also improve its case for being a partner in development if it did more to address the distorting effects of its own operations. The private sector must become more involved in structural solutions to alleviating poverty, such as fairer trade rules, according to Mr Hobbs at Oxfam.
"What is the view of business on the collapse of prices of commodities such as coffee, which has been a disaster for poor farmers but very good for the big roasters?" he asks. "We can and should do a lot more to avoid poverty in the first place rather than focus on projects to get people out of it."
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