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“Sustainable development is the answer to poverty reduction.
And business is key for sustainable development.”
Defining the Drivers of Poverty Reduction: Engaging Businesses for Sustainable Development
In 2000, 189 countries made a promise to free people from extreme poverty and multiple deprivations. To this end, eight Millennium Development Goals (MDG) were developed. The first goal is to eradicate extreme poverty and hunger; it includes three interrelated targets: 1) halving, between 1990 and 2015, the proportion of people whose income is less than one dollar a day; 2) achieving full and productive employment and decent work for all, including woman and young people; and 3) halving the proportion of people who suffer from hunger. With three years left to 2015, estimates show that this MDG may be within reach, although the global economic downturn and uncertainty about the future may jeopardize its achievement. Dramatic progress has been achieved in Asia where, for instance, China has benefited from accelerated economic growth in past decades, lifting hundreds of millions of people out of poverty. Latin America and Africa have also experienced robust economic growth in the past five to ten years, allowing many countries to significantly reduce poverty. However, according to World Bank estimates, almost one billion people will still live in poverty in 2015, and addressing poverty, especially for the remaining pockets of the poorest, still constitutes an important challenge for developing countries.
Recognizing that economic growth represents the single best answer to poverty, most governments and the development community have focused their efforts on creating the right conditions for growth. These conditions must take into account not only the quantitative aspect of growth, but also its qualitative nature, so that it can be sustained over time, ensuring fair economic and social progress and meeting the growing global population’s aspirations. In other words, rapid and sustained poverty reduction requires that all people in a country contribute to and benefit from economic growth. It also requires that economic growth be sustainable not only over time but with regard to natural resource deployment, so the needs of future generations can be met as well as those of today. This is our definition of sustainable development.
The private sector, under the appropriate regulatory framework and with market incentives, drives job creation, innovation and the accumulation of resources for core public functions, such as the delivery of health and educational services. About 90% of employment in developing countries derives from the formal and informal private sector, as does the vast majority of capital flows into developing countries.
In this context, the objective of the Global Agenda Council on Poverty & Economic Development is to identify and share best practice examples of how businesses are contributing to poverty reduction and sustainable development, and to propose concrete actionable recommendations that can help address the bottlenecks hindering this process. These recommendations will then contribute to the global discussion on poverty and economic development through the participation of several Council Members in such international fora as Rio 20+ and the G20.
An Oasis in the Desert: Sustainable Business Practices in Developing Countries
number of local and multinational companies have shown how business can become sustainable. These best practices can be clustered around four areas. In an extended version of this paper, examples of each area are included.1
Boosting entrepreneurship, including social entrepreneurship, with special focus on people at high risk of exclusion, such as women
Several developing countries have experienced strong development in entrepreneurial activity, with the creation of many new, mainly small and medium-sized enterprises that are becoming global players. In emerging economies, companies such as Infosys, Bharti Airtel or Tata in India, Embraer in Brazil, MTN in South Africa, Haier and Huawei in China or Grupo Alfa and Grupo Bimbo in Mexico have rapidly grown in past decades to become global references in their sectors, generating millions of jobs in their local markets.
However, entrepreneurial activity still remains low and unevenly distributed across all segments of the population. Women still lag behind, despite the potential benefits they can bring in terms of improving family income and well-being, increasing efficiency or raising their empowerment.
Improving indigenous companies’ supply chains and leveraging local multiplier effects throughout multinational corporations’ value chains
Businesses that have improved the supply chain of local producers have generated important gains by addressing the major constraints and opportunities that farmers and producers, processors, traders and other businesses face at multiple levels and points along a given value chain. This includes a wide range of activities, such as ensuring access to the full range of necessary inputs, facilitating access to cheaper or better inputs, strengthening the delivery of business and financial services, enabling the flow of information, facilitating improved market access, or increasing access to higher-value markets or value-added products.
Closely related, multinationals with their strong buying power are also key players. Examples show that they can have a strong impact either directly (by creating decent/better jobs with respect to people and the environment) or indirectly (by generating income through their suppliers, customers and those who support their growing employee base, and by raising the standards in their value chain). By systemically looking across their entire supply chain, multinationals can leverage the multiplier effect and utilize their core business capabilities to achieve sustainable development goals.
Building efficient public-private-partnerships
Many businesses are increasingly working in partnership with governments and civil society organizations to find multistakeholder solutions to common challenges, such as infrastructure, agriculture and food security, or access to renewable energy in remote areas of developing countries.
Developing business innovations that work for the poor
While increasing available incomes is the most effective mechanism to improve wide-range participation, poverty reduction also comes from making goods and services more affordable for the poor. Indeed, both trends should work simultaneously to reduce poverty.
Many examples of how businesses profitably serve low-income populations exist. Base of the Pyramid (BOP) businesses have effectively targeted the world’s four billion people living in poverty as consumers, employees and producers. And many more companies are now introducing profitable innovation by developing new-to-the-world products and services specifically designed to meet the needs of the world’s poor. This is quite a shift from the days when business simply modified what worked for high-income groups.
Bottlenecks Preventing the Expansion of Good Sustainable Business Practices
Progress to engage business in sustainable development to date has been only incremental – often limited to a few “success stories”. Quantum change is required to ensure that businesses and markets are at the centre of delivering sustainable development, rapidly and at scale. However, a number of persistent bottlenecks still hamper the ability of these practices to be increased and replicated. Some of the main weaknesses include:
Weak institutional development
It is clear that many of the characteristics of a defunct political system, such as instability or corruption, undemocratic governance or the lack of protection for human rights, play an important role in preventing sustainable business from flourishing. Without governance models that offer an enabling environment for the private sector, it is not possible to create a fair, transparent and functioning institutional market, one that promotes trust, confidence, integrity and mutual accountability in both governments and the business community. These principles are the basis of closer collaboration and partnerships between actors.
Both the indigenous and multinational business communities have a crucial role to play in setting a benchmark to fight corruption and demonstrate meritocratic practices, in both hiring and promoting workers.
Counterproductive regulatory and administrative frameworks
Smart regulation is crucial to promote sustainable development. Regulation is needed to protect and promote the interests and well-being of citizens and their environment, and to deliver on the full range of public policy objectives. Moreover, regulation in some instances is instrumental to eliminate inefficiencies in the market, such as the fragmentation of the offer or monopolistic or quasi-monopolistic dominance forces. At the same time, regulation must allow businesses to work and compete effectively.
Smart regulation must take into consideration the whole policy cycle from the design of the legislation to its implementation, enforcement, evaluation and revision. It therefore requires a strong and timely legal system and a strong institutional set-up, absent of corruption and bribery.
Poor access to technology, innovation and skills
New sustainable business practices can require access to new technology, methods and services, know-how and skills. Many people who would like to be entrepreneurs or businesses that have potential for further expansion can suffer from this lack of expertise in many developing countries. In addition, to ensure environmentally sustainable business practices, many existing companies lack the capacity to move to less polluting technologies. The private sector, especially multinational corporations, can contribute to bridging the knowledge gap by creating stronger links with the local companies along their value chain. Well designed and implemented knowledge and expertise sharing programmes can facilitate the access to much of the knowledge needed for new and improved sustainable business practices.
Insufficient access to capital and finance
In recent years, financial inclusion and, more broadly, issues around access to capital and finance have become recognized as important determinants of overall development outcomes. Access to transaction services allows for more economic activity to take place. This in turn can increase incomes, creating the demand for yet more financial services, contributing to a positive feedback loop. Economic activity has a multiplier effect, allowing for economies to grow exponentially.
The development and deepening of formal banking systems, and improvement in the reach of financial services, have played an active role in allowing the pooling of savings, relaxing the financing constraints experienced by entrepreneurs, and facilitating the transformation of savings into investment. Governments, in association with commercial banks and specialized credit guarantee companies, may provide concessional business loans and/or introduce credit guarantee systems that will support entrepreneurs. Access to long maturity finance for long-term infrastructure investments, such as energy, telecommunications or roads, especially in economies that experience marked cyclicality (associated with agricultural cycles, for example), may also help dampen the volatility otherwise associated with growth, smoothing both foreign and domestic investment. Public aid flow has a role to convert the private flow into a steady and reliable source to finance development.
From Principles to Practices – Implementing Responsible Business Practices
As well as being an engine for inclusive and sustainable growth and development, the private sector can directly impact on poverty reduction and sustainable development through its own policies and practices. The need for companies to assess and manage their impact on people and the environment is particularly important when operating in countries with weak enforcement of international and national regulations regarding, for example, human rights or environmental issues. The UN Global Compact and the OECD Guidelines for multinational enterprises provide a basis for “what” principles business should align with. The ISO 26 000 Social Responsibility provides voluntary guidance on “how” to put these practices into practise. And the Global Reporting Initiative (GRI) provides a framework for “how to measure and report” on their sustainability performance.
These instruments are all based on international norms and principles on which almost all countries in the world have agreed, such as the UN Declaration and the International Labour Organization’s Core Conventions. They are all multistakeholder initiatives with strong support from business in different parts of the world.
Achieving sustainable development including poverty eradication requires a thriving private sector as the engine for inclusive and sustainable growth. To enable sustainable businesses to flourish, an integrated and holistic strategy that concurrently addresses the several bottlenecks hampering that engagement will be required. Bottlenecks reinforce each other so it is difficult to break the vicious circle. However, progressive improvements achieved in particular areas will also strengthen each other.
To start this process, a number of recommendations are offered:
Governments should ensure democratic governance, the rule of law and respect, and protect human rights to create the foundation for sustainable business practices.
Governments should provide the fundamentals for private-sector development, including stable and efficient legal and financial systems, the protection of intellectual and property rights, macroeconomic stability, free competition and an efficient bureaucracy.
Governments and businesses should build knowledge-sharing platforms to facilitate access to technology, services, know-how, finance and the skills needed for sustainable business practices.
Businesses should implement internationally recognized norms and principles on responsible business practices, such as the ten principles of the UN Global Compact, the OECD Guidelines for multinational enterprises, ISO 26 000 Social Responsibility and the Global Reporting Initiative for sustainable development performance.
Expanding successful practices
Governments and businesses should provide start-up services for entrepreneurs, including micro-credit programmes, assistance and advice, and provide support networks and incubators.
Businesses should systemically look across their entire value chain and utilize their core business capabilities to contribute to sustainable development.
Governments and businesses should build strategic partnerships to address systemic issues and utilize the core competences of partners, such as convening power, resources and technical expertise.
Businesses should explore the opportunities of addressing poor people as consumers, employees and producers. Government and financing institutions should support innovations and investments in sustainable development practices by providing loans and guarantees to businesses and entrepreneurs.
From Insights to Impacts. Turning Council Recommendations into Action
The Council’s recommendations have already contributed to the ongoing debate on the role of business for sustainable development that started during the Earth Summit in Johannesburg in 2002. In the preparatory work ahead of the Rio conference on 20-22 June 2012, the private sector is mobilizing through conveners such as the World Economic Forum, the Global Compact and the World Business Council for Sustainable Development. At the World Economic Forum Annual Meeting 2012 in Davos-Klosters, a number of high-level events on sustainable development took place during which the views of the Council were represented.
In addition, Council Members will actively participate in several crucial events that will take place in the coming months, during which they will have the opportunity to put forward the Council’s recommendations. Green growth is a top priority for the G20 this year and the development working group is currently exploring potential deliverables for the G20 Summit on 18-19 June. An important issue being discussed is how technology, markets and finance can be mobilized to foster sustainable development, all areas highlighted in the Council’s work.
Moreover, the “Stockholm+40” conference that took place in Sweden on 23-25 April devoted its ministerial dialogue to the “Partnerships for Sustainable Development” theme, and a discussion on the drivers behind success stories, smart incentives and how strategic partnerships can be developed took place.
The work of the Global Agenda Council on Poverty & Economic Development will feed the ongoing discussion on defining the new Millennium Development Goals that will govern the global fight against poverty after 2015. This theme will be the focus of the Council’s work for the next two years, joining forces in this endeavour with the Global Agenda Council on Benchmarking Progress, which has already been working on this topic.
The opinions expressed here are those of the individual members of the Council and not of the World Economic Forum or any institutions to which they are affiliated.