13 Mar 2006  Research & Ideas

Global Poverty Needs a Global Answer

A World Development Corporation could help business, government, and non-governmental organizations collaborate more effectively to ease global poverty, believes George C. Lodge, HBS professor emeritus. He discusses recent developments.

 

HBS professor emeritus George C. Lodge's idea of a World Development Corporation has been percolating for years—he wrote a seminal article on the proposal in Foreign Affairs in 2002 (reprinted on HBS Working Knowledge).

The WDC would be a for-profit organization that would create sustainable improvements in impoverished countries. Lodge advanced the ideas in a January 2006 two-part piece in YaleGlobal coauthored with economist Craig Wilson. The authors also have a book due in May, A Corporate Solution to Global Poverty: How Multinationals Can Help the Poor and Invigorate Their Own Legitimacy, to be published by Princeton University Press.

In this recent interview conducted by e-mail, Lodge is hopeful that the World Development Corporation will be formed. He explains why nonprofits aren't the answer to ending poverty and asks that executives look beyond philanthropy to make lasting positive change.

Cynthia Churchwell: In your Foreign Affairs article, you shared ideas on first steps to forming a World Development Corporation. What obstacles do you think have prevented this organization from coming into existence? What hope do you have that it will be created in the foreseeable future?

George C. Lodge: Bureaucratic inertia is strong. Big organizations do not like change. There is considerable mutual suspicion among MNCs, NGOs, and multilateral organizations. They are all busy doing what they are doing.

There are ideological problems as I mentioned: Business and government are supposed to be kept separate and preferably distant. And many agree with Milton Friedman who famously said that the purpose of business is to maximize returns to shareholders and compete to satisfy consumer desires in the marketplace. Government—not business—is supposed to define and insure the fulfillment of community needs. (Of course, Friedman's formulation leaves the manager with two problems: the sum of consumer desires does not necessarily equal community need, and many—perhaps most—governments to not define or fulfill community needs in a fashion that is acceptable to many. Thus business is left with no choice but to do so.)

Nevertheless, there is slow and I believe inexorable movement in the direction of a WDC, because it makes sense for all concerned. It will take time but it will happen. Just the other day the CEO of a major MNC decided to take time to get it started.

Q: Your YaleGlobal piece mentions Growing Sustainable Business and the Investment Climate Facility for Africa as positive collaborations between business, government, and nongovernmental organizations. Are there other examples that provide hope of continued partnerships such as these for reducing global poverty?

A: Yes, there are many. Here are two: DaimlerChrysler some years ago, under pressure from the Green Party in Germany, decided it had to increase the amount of renewable resources it used in the manufacture of its cars. The manager of the company's Brazilian subsidiary decided to make use of locally grown coca fibers for the manufacture of head rests and seats. With the help of Brazilian NGOs and the U.S. government's Inter-American Foundation, he found a community organization called POEMA in the impoverished northern part of the country near Belem where coca grows abundantly. With public sector financial help a joint venture was set up with POEMA, a modern high-tech factory built, and coca plantations developed. Some 5,000 people were employed. Literacy levels soared. Political participation increased. Change had been introduced.

The U.S. Agency for International Development has funded initiatives by Land O' Lakes in some twenty-three poor countries. In Albania, for example, Land O' Lakes has organized 8,000 women into cooperatives for the production of dairy products, providing technical support, veterinary services, and the like. While requiring public sector funding at first, these operations eventually become profitable.

The WDC would be a center of research and learning about the impact of business on poverty reduction.

Q: In what ways could the World Development Corporation be better than other partnerships to improve quality of life and investment climates?

A: First, it would provide for a collective approach to poverty reduction. The WDC board of directors would include about twelve of the world's most admired MNCs. In addition, associated companies could be called on to participate in particular projects as necessary. For example, let us imagine a Nestlé dairy operation in a rural area. It might be augmented and complimented by companies engaged in electric generation, telecommunications, housing, and water purification. Poverty, as we have noted, is systemic. Its alleviation requires a systemic approach by companies that are profit oriented. They must be profitable to be sustainable.

Second, the WDC would take the initiative to target projects in countries that have a good chance of success, where the government is hospitable, the local business community eager for partners, and where public funds or low-cost financing can be obtained for the project's early stages. It would organize the interface with supporting institutions such as the World Bank and the UNDP, and with local business partners. And since the WDC would have NGO representation on its board, it would assure NGO cooperation.

Third, the WDC would be a center of research and learning about the impact of business on poverty reduction, something about which we know surprisingly little today.

Q: How much progress do you think has been made towards reducing global poverty? Are there other key components to poverty reduction in addition to multinational corporations?

A: Many Asian countries have made spectacular advances. These include post-WWII Japan and more recently Singapore, China, India, South Korea, and Taiwan. Nevertheless most Africans were better off forty years ago than they are today. Average per capita incomes in the Moslem world from Morocco to Bangladesh and beyond to Indonesia and the Philippines are one half the global average. Poverty in Central Asia is increasing as it is in many countries of Latin America, even those that are relatively prosperous like Mexico and Brazil.

The key to poverty reduction, as the Asian examples show, is business, especially small- and medium-sized domestic companies. They provide the jobs, the income, and the motivation for individuals to become educated and move up in the world. For local business to flourish, however, it often needs access to world markets, technology, credit, and managerial know-how. This is the reality of globalization. And MNCs provide that access.

It is also important that governments provide a hospitable climate within which business can invest and grow. Infrastructure also is important—ports, roads, electric power, etc.

Q: If you could speak directly to executives of multinational enterprises who want to help reduce poverty, what would be some practical first steps you would suggest they take?

A: Many big companies are now spending substantial amounts of time and money on being "socially responsible." I would ask them to think more imaginatively than they have about how this time and money could be more effectively spent. Philanthropy is not the answer. A way must be found to align the profit-making capabilities of MNCs more effectively to poverty reduction, especially in those countries that now have little if any MNC investment.

No company can act successfully alone. The risks are too high. I would ask them first to call a meeting of CEOs of major MNCs concerned with global poverty and explore the idea of establishing the World Development Corporation, proceeding experimentally and in collaboration with carefully selected NGOs and representatives from the UN and the World Bank. Trying a few projects and seeing how they worked would risk little.

Q: You have had a long-time interest in studying developing countries and the international economy. What has helped maintain your interest over the years?

A: Since I first came to Harvard Business School in 1963 I have been trying to find ways to teach about the political, social, economic, and cultural environment of business, the context that shapes corporate purpose, provides corporate legitimacy, and in many ways controls business activities. In short, I have been trying to learn and teach about how the world works. In this I have enjoyed collaborating with many colleagues in the HBS unit called Business, Government, and the International Economy (BGIE).

My special interest in developing—or poor—countries goes back fifty years to the days when I was in government in charge of international labor affairs in the U.S. Department of Labor during the administrations of Eisenhower and Kennedy. It was a time when many countries in Africa and Asia were emerging from colonialism. Often trade union leaders were in the forefront of these independence movements, and I traveled the world talking to them. My first book, Spearheads of Democracy, described their activities.

The key to poverty reduction, as the Asian examples show, is business.

Soon after I came to Harvard I was put in charge of helping to start a school of management in Central America, Instituto Centroamericano de Administración de Empresas. (Today INCAE is judged to be the best business school in Latin America and among the best in the world.) As part of my work there I conducted a three-year research project in Veraguas Province, Panama. My students and I had the great good fortune to observe and assist the bishop of the province, Marcos McGrath, establish a cooperative movement that helped some 3000 impoverished peasants. A book, Engines of Change, resulted from this and subsequent research in several other poor regions of Latin America. In the course of this work I discovered that the most efficient—and sustainable—engines of change were in fact corporations. In the province next to Veraguas, for example, the Nestlé company's dairy operation had a very similar effect to that of the bishop's movement. The big difference was that it made a profit. There isn't enough charity money in the world—or tax revenue—to reduce global poverty substantially. It can only be done by profitable business.

In 1997 the World Bank sent me to Kazakhstan to help the minister of planning think about the country's growth. At the same time I had an opportunity to study the Bank's programs in other poor countries. It was clear that what the Bank and other development agencies were doing was not reducing poverty. In some instances it was actually making it worse by sustaining the political and social arrangements that caused poverty, while increasing the country's debts.

My interest in these matters was further strengthened by a fascination with ideology—that is, the framework of beliefs and ideas that a community uses to define and implement values, having to do, for example, with rights and duties of membership in the community, the role of government, and the definition and fulfillment of community needs. Business derives its legitimacy from ideology—the ideas of property rights and marketplace competition, for example. In the 1980s, Professor Ezra Vogel of Harvard and I compared the ideologies of nine countries, noting how the sources of management authority differed. I have written a number of books about the gap between ideology and practice and the legitimacy problems that spring from that gap. So when I retired from active teaching it seemed like a good idea to write a book combining these two interests, drawing attention to the eroding legitimacy of great publicly-held corporations while at the same time noting their critical importance as engines of change to help the poor in the developing world. Fortunately, Craig Wilson of Australia was willing to join me. He has worked many years in developing countries, most recently as manager of private sector development in East Asia for the International Finance Corporation. Our book, A Corporate Solution to Global Poverty: How Multinationals Can Help the Poor and Invigorate Their Own Legitimacy, will be published soon by Princeton University Press.

Q: In your research, how do you define a "developing country"?

A: Good question. Of course, all countries are "developing" in one way or another. What I mean by the phrase is that countries or regions of countries in which poverty—described by the World Bank as living on less than $1 a day—is endemic, that is rooted in the political, social and economic system as is the case in many countries of Africa, Asia, and Latin America—even parts of relatively advanced countries like Mexico and Brazil. Some countries—for example, China, South Korea, Taiwan, post-war Japan, and Singapore—have dramatically reduced poverty; and, it is worth noting, they have done so by encouraging the growth of domestic business and multinational corporate investment.

In many ways the use of the word "development" is misleading because it implies a process that is noncontroversial: Who after all can be against "development"? In fact, as we discovered in Veraguas, the word means profound reform and change—permanent, irreversible, radical change, threatening if not subverting the status quo, rarely supported by governments who represent the status quo.

It is thus highly controversial, raising difficult questions: Who is changing whom? In whose interest? At what speed? And do those being changed want to be changed? It's often dangerous—one of Bishop McGrath's priests was killed by those who opposed the changes he was introducing. So an engine of change needs to provide protection as well as economic and political power, access to world markets, technology, credit, and more. Thus we can see why MNCs can be such effective change engines. We can also see why channeling money into governments that lack either the desire or the ability to introduce change does not produce anything that can be properly called development.

Q: What has been your most surprising observation during your work?

A: In the course of writing A Corporate Solution to Global Poverty, Craig Wilson and I sought to describe what you might call the international development architecture—all the organizations aimed at reducing global poverty. To our surprise we discovered a huge gap in that architecture.

The organizations we examined included governmental and intergovernmental organizations—foreign aid agencies, development banks, the United Nations and its specialized agencies, regional organizations like the OECD and more; nongovernmental organizations (NGOs), some 6,000 entities that seek to help the poor; multinational corporations that in the course of their regular, profit-making business activity reduce poverty, and associations of MNCs such as the World Business Council on Sustainable Development that encourage poverty-reducing activities.

What surprised us was how weak the linkages were between MNCs and NGOs on the one hand and governmental and intergovernmental organizations on the other. MNCs demonstrably reduce poverty by providing jobs and nourishing local business. NGOs want to reduce poverty but often are reluctant to cooperate with MNCs in doing so, preferring to attack business for its failings. Public sector organizations like the UN and World Bank are leery of business for ideological reasons: They feel that business and government should be separate and distant from one another, and are concerned that business somehow contaminates public sector organizations.

This linkage failure, we found, greatly retards effective poverty reduction. Public sector funds could be combined with MNC profit-making activities to greatly enhance the effectiveness of both in reducing poverty. Such combination, however, raises obvious legitimacy problems. Thus NGO involvement is essential to monitor and provide assurance that the poor are benefiting from the public-private partnership. NGOs, in spite of their own legitimacy problems, have become the conscience of the world, and they will remain so until the world finds some way to form a government.

We observed that MNCs, NGOs and intergovernmental organizations, such as the United Nations Development Program and the World Bank, have taken small steps in the direction of collaboration and partnership, but they are very small indeed. Thus we propose a new institution to facilitate the cooperation. We call it the World Development Corporation.

About the author

Cynthia D. Churchwell is a business information librarian at Baker Library, Harvard Business School, with a specialty in the international economy.