12 Aug 2002  Op-Ed

Using Big Business to Fight Poverty

Can an international alliance of global corporations win a war on poverty? Yes, if such an alliance is well planned and formed soon, according to HBS professor emeritus George C. Lodge.

 

In recent months, world leaders—including President George W. Bush and UN Secretary-General Kofi Annan—have proclaimed their determination to reduce global poverty. Such promises, however, have been made before, and past efforts to follow through on them have been disappointing. Success this time will require a new institution that can harness the capabilities of global corporations and, helped by loans from development agencies, directly attack the root causes of poverty.

The need for corporate involvement in the fight against poverty stems from several factors. To begin with, many of the world's poor live in countries where governments lack either the will or the ability to raise living standards on their own. Financial assistance to such governments, therefore, has often not helped their neediest citizens. In fact, in spite of the roughly $1 trillion that has been spent on grants and loans to fight poverty around the globe since the end of World War II, nearly half the world's six billion people still live on less than $2 a day; a fifth get by on less than $1. At times, foreign aid has even worsened the plight of the poor, by sustaining the corrupt or otherwise inefficient governments that caused their misery in the first place. In such mismanaged countries—which number close to seventy—a way must be found to change the basic system.

Globalization—seen by many today as a sort of cure-all—will certainly not eradicate poverty on its own. True, international trade and investment have increased vastly over the last decade, making many people richer. But the problem is that the process has not really been global enough. In fact, some two billion people today live in countries that are actually becoming less globalized: Trade is diminishing in relation to national income, economic growth has stagnated, and poverty is on the rise. Most people in Latin America, the Middle East, and Central Asia are poorer today than they were ten years ago, and most Africans were better off forty years ago. The average per capita income of Muslim countries, from Morocco to Bangladesh and Indonesia to the Philippines, is now just half the world average.

Poverty is not, of course, a new phenomenon. But during the Cold War, economic misery abroad did not matter to Washington; the United States and its allies were concerned with sustaining anti-Soviet regimes, not raising living standards. Today, however, a new determination has emerged to deal with what one UN panel has called the "pre-eminent moral and humanitarian challenge of our age." This new resolve may be motivated partly by compassion. But it also reflects a growing recognition that terrorism flourishes among those who think they have nothing to lose. Western governments have also come to appreciate that the world's financial system, which came close to meltdown on several occasions in the 1990s, depends on political stability to sustain itself. And stability in turn requires governments to maintain a certain legitimacy, which means broadening the base of political involvement to include the poor. Poverty, after all, is not only a matter of income; it also reflects and takes form in powerlessness, alienation, isolation, illiteracy, and disease.

The World Bank has argued that the best way to combat these scourges is for rich countries to double their foreign aid budgets, and Gordon Brown, the United Kingdom's chancellor of the exchequer, has called for a new Marshall Plan to fight poverty. Both initiatives are misguided, however. Unless a new means is found to ensure that foreign aid does what it is intended to—that is, reduce poverty by attacking its causes—such efforts would only make matters worse. The success of the Marshall Plan, after all, was due in part to the fact that postwar Europe had retained a social, political, and institutional infrastructure—albeit one battered by conflict—that could be revived with an influx of financial resources, and that would ensure fair distribution of the fruits of the resulting growth. Today the poorest regions of the world benefit from no such infrastructure. And what systems do exist actually cause destitution. Without basic change, no amount of talk about free markets or balanced budgets will make a difference.

The solution is an entirely new engine of change: a World Development Corporation (WDC). This entity could be chartered by the United Nations and established as a joint venture by a select group of global corporations based in Asia, Europe, and North America. Assisted by rich governments and by loans from development banks, the WDC would bring to impoverished areas technology, credit, access to world markets, and management know-how. Its projects would need to be subsidized at first but should become profitable in the long run. This last element is critical, for there is not enough charity or taxpayer money to make a sustainable difference; only the profit motive can do that.


Earning and learning

Rather than merely applying superficial aid, the WDC, with its varied and integrated capabilities, would work to change the very system that has caused poverty in poor countries in the first place. Here again the profit motive would come into play. The WDC would not only provide jobs and raise incomes, it would also improve education by giving individuals a new motivation to pursue it. Education, after all, means more than just school buildings, teachers, and textbooks. In much of the developing world, the poor lack faith that changing their lives is possible; few believe in the existence of a social or economic ladder that, with the proper education, they could use to climb out of their poverty. As a result of such despondency, children are not encouraged to go to school; many fail to attend at all or drop out early. Yet many multinational corporations, while undertaking their regular profit-making activities, have managed to change this attitude by providing jobs and opportunities that inspire the hope of change; examples include Coca-Cola in Venezuela, Intel in Costa Rica, and Land O'Lakes International, Cisco, BP, and IBM in many countries. These are the kinds of initiatives that the WDC would undertake and encourage.

With backing and financial contributions from governments, multinational corporations have it in their power to become the world's most effective means for reducing poverty
—George C. Lodge

The success of a DaimlerChrysler project in Brazil's poverty-stricken northeast provides a particularly good example of one such venture—and of what corporate initiative can accomplish when harnessed to development work. In 1992, having come under pressure from the Green Party in Germany, DaimlerBenz (as it was then known) started looking for ways to use more renewable natural fibers in its automobiles. At the same time, the Brazilian government was demanding that companies with manufacturing facilities in the country increase their local content. To address both problems at once, Joachim Zahn, the head of DaimlerBenz in Brazil, arranged with POEMA, a local antipoverty program in Belem, to construct a modern, high-tech factory that would make headrests and seats out of coconut fibers from locally grown trees. As of today, some 5,200 people are employed by this project. For these formerly impoverished Brazilians, life has dramatically changed for the better. Their children are now in school and doing their homework, not dropping out. People have hope for a better life and have become active politically. Health facilities have also improved.

Although this operation will eventually turn a profit for DaimlerChrysler, it could not have happened without the help of the German and Brazilian governments. This highlights another role the WDC could play—marshaling often-essential government support for new development projects. With backing and financial contributions from governments, multinational corporations have it in their power to become the world's most effective means for reducing poverty.

This unmatched power is based on several key assets that corporations can bring to bear on development projects. First, corporations possess the competence for the job—in the form of skills, technology, and access to global markets and credit. The market by itself does not necessarily help the poor; special efforts are required to ensure success. Nor is it sufficient, say, to simply connect rural villages to the Internet; villagers must also be taught how to use it and have a reason to do so. That takes training, education, and motivation; corporations can provide all three.

Corporations also enjoy remarkable access to power. Big companies are able to reach and pull the levers of government in order to get a road built, to have a power line strung, or to obtain police protection for a project. Corporations can also empower citizens more directly. By motivating, organizing, and educating people, multinational companies can help them participate in political processes from which they were once excluded.

Another asset big corporations enjoy is the power to protect programs once they are put in place, and the strength to thwart the status quo. With this power comes impressive reach as well, access to even the most remote locations. Finally, corporations tend to stick with projects once they have been initiated.

All of these attributes are important to poverty alleviation, because development is far more than just an economic process. Development has political, social, cultural, and psychological components; it often entails permanent change, which can be radical in nature. Effective development often disturbs the status quo, which, in most instances, local governments—especially corrupt or ineffective ones—are inclined to preserve and protect.

Doing it right

The dislocating effects well-intentioned development can sometimes wreak were made painfully clear to me a number of years ago in Veraguas province, Panama, where I was working with students to help a radical bishop, Marcos McGrath, establish credit and marketing cooperatives. Local government experts who did not understand the system in place at the time did not help us; in fact, they were a menace. One government seed specialist, for example, told a subsistence farmer to plant tomatoes. The farmer did—and they flourished so well that the landowner on the hill above decided to extend his fences to include the farmer's land, which the landowner had previously thought worthless. The farmer, who had no clear title, was unable to fight back.

This experience, which demonstrated the importance of understanding the system that leads to poverty in the first place, was reinforced several years ago, when the World Bank sent me to Kazakhstan to help the minister of planning draft a strategy for the economic development of the country. Kazakhstan is rich in oil and minerals. These resources were being exploited by foreign companies, in partnership with a government that displayed many signs of corruption, and in a way that contributed little to the local population. World Bank loans and foreign aid to the government did not then and would not in the future reduce poverty, especially among the 80 percent of the population that lived in the countryside. Millions of rural Kazakhs had been left destitute when, with the end of communism, the huge wheat-growing collectives of Soviet times were abandoned—and with them the schools, hospitals, and infrastructure that had been built and sustained by large Soviet subsidies.

Western economists urged the Kazakh government to break up the collectives into privately owned farms of 200 hectares apiece (the average size of a wheat farm in Saskatchewan) and let the free market do the rest. But this was impractical advice. Farmers conditioned by three generations of cradle-to-grave security were not about to become good homesteaders. Furthermore, there was no local market for their goods, and the farmers did not even understand the idea of a market in the first place. Nor was credit available to pay for farm supplies or equipment. Roads and electric power lines, such as they were, served the old collectives, not the new farms.

Local government experts who did not understand the system in place at the time did not help us; in fact, they were a menace.
—George C. Lodge

What was needed then to really improve matters—as most Western economists failed to recognize—was basic, systemic change, not a rapid introduction of a market economy. There is only one good way to establish a new economic system to replace the old: bit by bit and locality by locality. And this process requires the kind of skills, knowledge, and access that only global corporations, such as Cargill, Nestlé, Unilever, Bechtel, or Mitsubishi, can provide. This is the thinking behind the WDC, which could combine such assets with loans from the World Bank to the local government, targeted to pay for roads, power, and other necessities.

Partners in profit

Clearly, many details need to be worked out if the WDC is to become a reality. It would require a few companies to step forward and take the lead. These companies might come from the 300 or so firms that have already joined the UN's Global Compact to promote social programs around the world.

To put the WDC in place, a number of actions would be needed. First, the UN would draft a corporate charter to define the purpose of the new body and assure its legitimacy. Given the prevailing mistrust of global corporations and the threat they pose to sovereignty, having such a UN imprimatur would be crucial.

Once the charter was adopted, a select group of global corporations, called WDC Partners, would establish the WDC itself, which they would then own. The partners would assign a small team of managers to set up and serve as a board of directors. The corporate partners would also recruit a larger group of corporations, called WDC Affiliates, to the effort. Partners and affiliates, as appropriate, would then undertake the WDC's actual projects.

Staff requirements would be small at first—about thirty people—and their salaries could be paid by the rich member states of the Organization for Economic Cooperation and Development. These employees would look for promising sites for the initial projects, seek out local partners (such as Brazil's POEMA), secure the support of local governments, and define the parameters of each individual project. Eventually the local partners would be expected to take over a controlling interest in the venture.

Once an affiliate corporation had been linked to local partners and the project got underway, it would be assisted as necessary by loans from development banks and grants of foreign aid. WDC projects would not run on charity, however; indeed, they would not survive if they did. Instead, the projects should eventually return profits to participating affiliates, their shareholders, and their local partners.

To ensure that projects start and remain within the guidelines of the WDC charter, the UN secretary-general would name a review group to monitor each venture. The WDC itself, however, would remain a small organization managed by people from many countries—and not dominated by the nationals of any one state.

By linking global corporations to local projects, the WDC would create profitable endeavors in order to reduce poverty permanently and irreversibly. As Harvard Business School Professor Ray Goldberg has pointed out, such ventures have already proven possible: A smaller version of the WDC has prospered for more than twenty years now in Latin America. Known as the Latin American Agribusiness Development Corporation (LAAD), its shareholders include sixteen major finance and agribusiness companies, including Cargill, Monsanto, Borden, Gerber Products, and Goodyear Tire and Rubber. Assisted by loans from the U.S. Agency for International Development, LAAD has helped establish and promote hundreds of agribusiness enterprises throughout Latin America—fighting poverty regionally in the way the WDC would do on a global scale.

John Browne, chief executive of BP—one of the world's largest companies, which operates in some 100 countries—recently spoke of "the climate of distrust surrounding...big business," and the fear that "such concentrated power is unconstrained." To restore trust, he said, "companies have to demonstrate that our presence, particularly in the poorer countries...is a source of human progress." As Browne made clear, it is indeed in the interest of the world's major corporations and their shareholders to improve their reputations. And the WDC would be the best way to do just that. Poverty reduction should not be left to governments and their creations like the World Bank, which have too often reinforced, rather than replaced, the systems that have caused so much suffering in the first place. A new global solution is desperately needed, and everyone would profit if it were put in place.

Reprinted with permission from "The Corporate Key: Using Big Business to Fight Global Poverty," in Foreign Affairs, Vol. 81, Issue 4, July 2002. Copyright 2002 Gale Group Inc. All rights reserved. COPYRIGHT 2002 Council on Foreign Relations, Inc.