Replies to This Discussion

Permalink Reply by Derrick on April 17, 2009 at 22:02

Hi Pete,

I wholeheartedly agree with you that businesses must try to combat poverty. I believe that businesses play a vital role in the larger society that they are a part of. You mentioned companies that companies like HP and Unilever are doing this through employees learning first-hand about the communities where Business funcions are operated. My concentration in the Business School at GW is Human Resources so I am very interested in this topic because I believe that Human Resources professionals play a vital role in this entire process. Here are a couple of questions that I have: Is there any concrete data showing that companies that combat poverty ultimately become more profitable? If not, do you still believe that there is truly an economic incentive for companies to tackle poverty in their regions? Would you favor a government mandate where companies had to allocate a percentage of their profits to trying to alleviate poverty in the regions they operate? Is there any role for government in this process in your opinion?

Permalink Reply by Pete Tashman on April 18, 2009 at 22:31

Hi Derrick,
I am not sure whether there is hard data in the form of a large sample statistical analysis. There is of course anecdotal evidence on a case by case basis that businesses can improve profits by addressing specific poverty issues in the communities in which they are embedded. There is also some evidence that businesses are unlocking wholly new market places by engaging in poverty alleviation issues and succeeding in the long term. But, many "pro-poor" ventures are failing as well. What the qualitative (and perhaps not concrete) data are showing is that businesses that 1) develop specific capabilities (superior stakeholder management skills, managers empowered to take chances, understanding of how to leverage informal community networks for things like marketing, distribution, supply chain development, etc...), 2) correctly idenfity institutional constraints and figure out how to address them can be succesful. I do believe there are at least two economic incentives for addressing conditions of poverty; 1) lack of education blunts the potential of a workforce 2) lack of healthcare, drinking water, food, public safety do as well 3) there are many institutionalize practices that facilitate trusting business transactions in the developing world that can be taught to the poor in a way that is congruent with their cultural norms, that will create much need social capital 4) there are numerous technologies and practices that can be given to the poor who operate in business value chains that would be great investments because they would improve the value of these value chains 6) the poor in the aggregate are the best market opportunity globally that is yet to be integrated in the global economy.

I am not a public policy expert, but government mandates I think are likely idealistic in developing nations where the governments lack authority, resources, legitimacy, skills and/or in some cases the desire to help their poor citizens. Forcing companies to allocate a percentage to some aid based goal is likely to create the same kind of results as foreign aid. I believe that public-private-civil sector partnerships are one good way to engage the public sector at a more bureacratic level, where, for example corruption and red tape have a tremendous impact on economic development. Cheers

Permalink Reply by Borany Penh on April 16, 2009 at 19:00

Dear all,

Apologies for joining late. I was out of the office earlier this week and preparing to be out part of next week. There are many interesting threads going on but I'd like to pick up on 3 in particular: Mitchell's question on challenges in a conflict environment, Efe's comment on utilizing local capacity, and Vito's comment on risk. These actually are all related issues for the context we are discussing, which is not just about poor countries but poor countries in or just emerging from conflict. My paper covers much of this already but just in case you haven't read it yet :), here are some key points:

The unique challenges in a conflict/fragile environment usually have to do with the serious missing institutional capacities, threat of massive violence or social instability, and immense level and scope of need for assistance. Every case is different but I think these are three typical characteristics. For entities that want to pursue a "double bottom-line" of profit and the promotion of peace, there needs to be an acute awareness of these challenges and how to overcome or transform them. Knowledge of what works to reduce poverty in "normal contexts" is not likely to be sufficient in conflict/fragile contexts. Security of operations, impact on political/social tensions, ability to meet or influence local expectations about gains, etc. are examples of some considerations that have to be made. Many of these issues were debated indepth at a 2006 conference I led, see: http://www.povertyfrontiers.org/ev.php?ID=1598_201&ID2=DO_TOPIC

So the real issue of risk in operating in these environments has plagued many actors. Entities willing and knowledgeable about managing these risks can succeed in these environments and do good things. A new (to donors) area that is getting more attention is that of the development impact of diaspora in their countries of origin (COOs). Members of diaspora are known to be more risk tolerant and resilient when it comes to crises in their COOs. This is not only because of their emotional ties to the COO but also their long-term outlook and close knowledge of the local dynamics.

This brings me to the issue of purposively including local community in economic recovery efforts. Most development actors understand that economic inclusion not only offers the local population economic opportunity but a key way of helping rebuild social cohesion, if done properly. One of my favorite stories is the case of Roshan, the leading telecom provider in Afghanistan. The company, partially owned by the Aga Khan Foundation, is headed by Afghan expats and mostly staffed by Afghans, including Afghan women. The company outsources many of its operational needs to local companies, generating jobs while reducing their holding risks. Not only has Roshan brought the ability to communicate nationwide to common Afghans, through their new mobile banking service (M-Paisa) they are able to extend financial services to the many previously "unbanked." M-Paisa lets customers remit money to family members (domestically for now), facilitates financial transactions between farmers and their customers, etc. For more on this see: http://www.microlinks.org/ev02.php?ID=29735_201&ID2=DO_TOPIC

However, I agree that there is a need for much more research into this area at both the theoretical and practical levels. I hope to hear more from the community here about their thoughts on specific priority areas. I also welcome any comments on my paper as it would only benefit from a diversity of perspectives.

Respectfully,
Borany Penh
Sr. Political Economist
U.S. Agency for International Development

Permalink Reply by Kim Bettcher on April 15, 2009 at 15:07

On the post-conflict question, it is of course difficult to attract investment while conflict is in progress, but business--especially the local private sector--must be encouraged early on to play vital roles during reconstruction (as opposed to long-term dependence on humanitarian aid). There is a "Post-Conflict Primer" in the latest issue of the Journal of International Security Affairs.

I echo Pete's view of CSR, or corporate citizenship, namely that companies should engage in CSR where they have a comparative advantage and where it makes sense to their own enlightened or long-term interest.

I am glad that Solomon Mpapale refers to wealth generation in conjunction with distribution. Without wealth generation, there is no real prospect of ending poverty. Solomon asks the million dollar question: How to implement?? Let's hear some views on that.

This brings me to the importance of property rights, because inclusive, well-defined, and liquid property rights provide a means for the poor to participate in wealth creation. So Elena Panaritis's topic is crucial! Of course, property rights are one piece of a larger puzzle that includes rule of law, freedom to do business, participation in policymaking, and other factors. After reading Elena's pieces, I strongly urge you to read, if you haven't already, the Mystery of Capital, by Hernando de Soto, the pioneer in this area.

Permalink Reply by Elena Panaritis on April 16, 2009 at 16:20

Hi Kim,

The issue of what I call "Unreal Estate" (lack of secure property rights) is as you say crucial. It's what allows the closing of the gap between those who have and those who have not.

It is what internationally acclaimed economist Willem Buiter called a few days ago at the Financial Times "Useful Finance" http://blogs.ft.com/maverecon/2009/04/useless-finance-harmful-finan...
The question though that can make or break the topic is not only that property rights matter for the robust development of economies and wealth across the board, but also HOW can we transform UNREAL (or as others call INFORMAL) to REAL (or FORMAL).?

I think the HOW is crucial and it's what can finally move us from the advocacy to the actual creation of real middle classes of people with real wealth and real presents and futures.

Elena

Permalink Reply by Raymond Gilpin on April 15, 2009 at 16:42

Thanks to all for very informative and thought-provoking comments. The importance of commerce as a driver for peace and development needs to be explored and analyzed much more closely. To my mind, this must not ONLY be done within the context of corporate social responsibility (CSR). Unfortunately, many companies view CSR in philanthropic terms - another box that needs to be checked to satisfy local constituencies. As such, some of these well-meaning initiatives are neither effective nor sustainable. There is an urgent need for the business community to approach this issue from a business perspective. Finding creative ways to do business in a way that is peace-promoting. One way to do this is by integrating local economic activities in their value-chains. In this way, they would not be providing handouts or performing philanthropic acts. They will be helping core competencies in the local economy to grow organically, while also addressing underlying and proximate causes of conflict. For example, a large textile firm could choose to use local fabric, rather than importing reams of fabric. Or a mining company could choose to buy all its paper from local manufacturers. In both examples, the linkages with the local economy will help reduce tensions between the community and investors, create a constituency for peace and help grow local businesses. A lot of the recent work on value-chain analysis focuses on this approach and helps investors and communities to identify productive synergies. I guess my point is that we need to move away from philanthropic CSR and engage local economies more productively.

Permalink Reply by Efe Sevin on April 15, 2009 at 20:02

I think this partnership with local economies is an important point in terms of perception. Borany Penh was also telling us that it is possible for locals to see all these attempts as intervention. In the case of businesses, they might be perceived as threats to the local economy.

With the local business integration, businesses will enjoy positive perception of the local people, as well as developing them in financial and social terms.

Permalink Reply by Shane Krieger on April 15, 2009 at 18:22

The recent foreign policy shift by the Obama administration towards Cuba is a good example of how economic freedom can contribute to political freedom and peace. The removal of restrictions against Cuban-Americans visiting and transferring money to family in Cuba will hopefully foster an environment of decreased public reliance on the Cuban government. Opponents of the recent American foreign policy change argue that this will have a negative effect on the pro-democracy movements that already exist in Cuba, which are groups that are vital for political change. However, American policy towards Cuba over the past fifty years has done little to promote more freedoms in Cuba and the time has come to change direction. President Obama's decision is an important first step towards further normalization of relations with Cuba, which has the potential to benefit both the American and Cuban economies. Cubans will experience with economic freedoms not felt since the 1950s, which will inevitably lead to similar political freedoms as the public gains control and takes advantage of the new situation. A continued effort towards the normalization of US-Cuban relations is necessary for these changes to occur, and a country that has experienced dismal economic conditions for decades can be revived.

Permalink Reply by Efe Sevin on April 15, 2009 at 20:14

I don't know whether the attached file was available somewhere on this website but I found it while I was doing a small literature review about economic freedom and political freedom.

This is an empirical research over the subject carried out by Wenbo Wu, Assistant Professor of Public Policy, Faculty of Arts & Social Sciences, National University of Singapore and Otto A. Davis, William W. Cooper University Professor of Economics and Public Policy, Department of Social and Decision Sciences, Carnegie Mellon University entitled "Economic Freedom and Political Freedom".

www.spp.nus.edu.sg/Handler.ashx?path=Data/Site/SiteDocuments/wp/200...

"The linkages depicted in these empirical studies relate economic freedom to economic growth, and economic development to political freedom. ... these two links seem to be well established. Moreover, these linkages suggest a less well established empirical the influence of economic freedom on political freedom. Such a link between economic freedom and political freedom would certainly confirm certain theoretical insights in the literature."

Permalink Reply by Kim Bettcher on April 16, 2009 at 15:16

I have argued that in addition to individual economic freedom, political freedom (by which I broadly mean democracy) also requires sound economic and political institutions that provide equal opportunities for participation and competition. You can get the whole story in Helping Build Democracy That Delivers.

Permalink Reply by Jun Kun Kim on April 15, 2009 at 21:04

There are many discussions about CSR. Yes it is critical for corporation to consider CSR; however, this should not be the only source of responsibilities. In order to gain access to poor countries, corporations should create job opportunities and economic prosperity in addition to CSR. For example, China is a communist country; however, nowadays they are one of the countries who welcome outside businesses and free trade because they have experience economic success and prosperity. Providing poor countries with financial success will open doors to gain access to those countries. At the same time, NGOs should work their expertise to advocate peace and freedom. However, it is important for the NGOs to not to cross any lines. For example, if a country is sensitive about certain NGO advocating freedom and peace, those NGO should be very careful not to cross any lines so that the government does not turn against other businesses and foreign government aid coming in. Everything takes times to change and adjust so NGOs should be very careful not to frustrate governments. In order to develop and advocate freedom and peace, wealthy governments should continue to support poor nations without any expectations of return favor. By doing so, those countries will slowly open doors to foreign commerce and NGOs. The best example of economic freedom contributing to political and peace is China. Although China is still a communist country with many steps to improve; however, it is clear that China have changed dramatically in recent years due to economic success. Simply to say, I believe when money enters into a under developed country, eventually they will start to change for the better and China is a great example.

Permalink Reply by Raymond Gilpin on April 15, 2009 at 21:18

Jun Kun Kim:

You raise very pertinent points about CSR --- a prelude to next week's discussion focusing on CSR (which I will be moderating). A broader look at the effects and implications of foreign business involvement in fragile and developing countries is an important dimension. While their investments and business activities could definitely be beneficial to the economy (through jobs, opportunity and externalities) and to the budget (via taxes and royalties), it is certainly makes sense to consider the political-economy. Relationships between freedom/human rights and economic prosperity are worth considering. Another aspect would be environmental protection. An over-arching question could be: what trade-offs should the business sector contemplate when investing in developing countries? Any thoughts?

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