Nowhere in the world is the loss of faith in big business more evident than in developing countries. But multinational companies can do a great deal to improve local governance in these countries – and, in doing so, help their own interests.
The world is coming out of a decade of enormous prosperity and success for business. It was an era that seemed to signal an extraordinary alignment of values between what the private sector wanted and what ordinary people wanted. It was characterized by a sense that markets, democracy, the rule of law and a global free trade system were not just in the interests of the corporate world but were also what individuals from a poor peasant in China to a middle-class consumer in the US – or someone struggling up the ladder of economic progress in Africa or Latin America – wanted as well. It was – or appeared to be – a rising tide of prosperity, opportunity and benefit for all.
But with the global economic downturn, combined with the events of September 11, 2001 and the understanding that globalization had, albeit indirectly, helped give both a motive and a means to that horrific act, the bubble has well and truly burst.
On the one hand there has been the wave of corporate scandals – Enron, WorldCom and the others – while on the other there has been a growing realization that the benefits of the boom of the 1990s were never as widely shared as many thought, with much of the world stagnating and some 60 countries actually getting poorer rather than richer.
The consequences can be clearly seen in the 2002 World Economic Forum/Environics survey, which shows declining trust in domestic and multinational corporations everywhere.
The loss of faith is most extreme in much of the developing world. It is clear in India, in the fury of Indian consumers charged high prices for energy from Enron’s investments there. Their anger was fuelled by the suspicion that the high price they were being asked to pay was a consequence of corruption.
It is also clear in the Niger Delta, where women on picket lines complain about oil companies’ past collaboration with dictatorial regimes.
The result is a real risk of long-term negative repercussions – not just for the role of the private sector in the national and international economy, but for globalization itself.
So how should business respond? There are two alternatives. It can either retreat to the old markets – circling the wagons and consolidating activities in OECD countries – or it can embrace a new business model which learns from the mistakes of the 1990s and builds a new vision of corporate social responsibility across the developing world.
While the former path holds obvious attractions, the latter is less clear cut. There are plenty of push and pull factors.
In addition to the growing distrust of corporate motives and actions, there is the consumer pressure of people wanting an assurance of the social quality of the goods provided. They want to know that their coffee has been grown in an environmentally sustainable way, that their diamonds have not come from a conflict zone and that their running shoes have not been made in a sweatshop.
There is also a rising social investor movement driving these issues from the other direction. And on top of that there is pressure on companies in developing countries to move into the provision of key services – such as big South African employers giving HIV/AIDS treatment to workers and their families – when the state is unable or unwilling to do so.
But how can we transform these pressures into a viable agenda for action? There are five ways in which the private sector can and should move forward. In doing so, it has the potential to transform the kind of world we live in.
First and most important is simple self-interest. The developing world is where the future is. Some 82 million of the 83 million people being added to the world every year live there. The challenge is to make sure that these people are part of new markets, rather than a source of instability, conflict or social breakdown. And that means reaching beyond the traditional borders of communities where business leaders live, work and operate.
There are lots of new options available – for example NetAid, an online giving system originally set up by the United Nations Development Programme (UNDP) in partnership with Cisco. NetAid allows corporations to adopt education programmes and other development programmes around the world.
But the point underlying them is the same: corporate social programmes should support rather than bypass society’s own capacity building. It is a great mistake when we allow the corporate provision of education or health care to become a long-term substitute for government providing these services.
Ultimately business and development organizations such as the UNDP have a common goal: to build up governments that are capable of providing for the schooling, health and human development of their people.
Second, we need to change the terms of engagement, particularly the way in which shady business practices can fuel corruption. That means being much more transparent in terms of investments made, profits repatriated and money paid out through contracts and other routes.
Take the issue of new investment in west African oilfields. In the interests of diversifying supply sources, it is likely that US dependence on oil from the region will grow from 15% of US oil consumption today to 25% by 2015.
That amounts to between 8% and 10% of the world total of barrels drilled, attracting in the region of $10 billion of new investment annually and billions more in revenues for increased oil extracted. In Africa, that is huge money – potentially very beneficial, but also potentially very destabilizing.
There are three broad options. The first is to regard some graft and corruption as simply the way business is done. But in an era when at least one big oil producer routinely “loses” $1bn a year, this risks the possibility of a growing public backlash over squandered funds.
That could lead to a government falling or contracts being revoked. At best, it would require a new cycle of bribery; at worst, it would mean a total loss of investment.
The second option is to retain much of the past in terms of basic business practices, but to complement it with enhanced corporate social spending in the regions where investment and extraction take place – so as to build up greater public support for a multinational presence.
The final option is to make the shift – whether through third parties such as the UNDP or the World Bank or some other mechanism – to much greater transparency about royalty and investment flows, so that the public can clearly see what money is going where.
While I welcome the second approach – the UNDP is very engaged with some companies doing just that – I would argue that, in the current climate of suspicion, combining it with the third option is the most effective and most sustainable solution.
It is effective because it does away with problems of the past. And it is sustainable because it is the best way of assuring governments, their successors and the wider public of companies’ good faith.
That vision is a central element of a number of recent broader initiatives, including the Global Compact of my own secretary general, Kofi Annan, which is also looking at new forms of corporate engagement at country level.
There is also the “publish what you pay” movement, which is an effort to get corporations to acknowledge commission payments publicly. This approach is being supported by a number of governments.
There are different solutions, but the key point is the same: transparency is an incredibly powerful weapon against corruption, and it is one that can and must be more effectively wielded by corporations.
The third key way in which the private sector could help is through the encouragement of local capital formation – and hence local private sector development – in developing countries.
Foreign direct investors need to recognize that while they are a key attraction for countries seeking capital – the gold at the end of the rainbow – they amount to less than 15% of capital formation across all developing countries, excluding China.
Here again there is enormous scope, particularly in financial services – as the catalyst for an explosion of micro-finance initiatives and broader financial intermediation – for companies to lend advice, training and other support not just to their own immediate circle of vendors and service providers, but to the broader local business community. That is the key to building up small- and medium-sized enterprises that are crucial to the jobs and income growth these societies so badly need.
Fourth is the enormous potential for new public-private partnerships in service provision, particularly in the wake of the World Summit on Sustainable Development in Johannesburg, where a number of interesting pilots of this kind were launched.
These should not simply involve contracts between governments and private companies, but enlightened partnerships of public leadership with private capital to take on the key redevelopment tasks of infrastructure provision in developing countries in areas such as water and sanitation.
Take the energy problem. Two billion people in the world have no access to electricity and almost as many again have erratic access. The public sector cannot solve that problem alone. In many cases national grids are not reaching out to the rural poor nearly fast enough.
Apart from holding back development, the lack of such services has devastating knock-on effects in terms of the environment and health through the burning of forests for firewood.
But the fact is that decentralized local power generation is going to require private know-how, technology and capital in partnership with a public regulatory environment and probably some public seed capital to make these ventures viable.
Fifth and last is the critically important role of the corporate sector in supporting development as a global priority in the coming years. Multinationals can be an effective voice in national policy debates about spending priorities for governments and in global debates, particularly with regard to issues such as the Millennium Development Goals.
These eight goals – agreed to by every country in the world and ranging from halving extreme poverty by 2015 to stopping the spread of HIV/AIDS and providing universal primary education for all boys and girls by the same date – represent a simple but revolutionary consensus on global priorities.
These can and should be business priorities, too, because they share a simple bottom-line premise. In a globalized world, our security and that of future generations depends on bringing a measure of prosperity and opportunity to all.
In achieving that goal and the security that depends on it, business is an indispensable partner.
Mark Malloch Brown
Mark Malloch Brown is administrator of the United Nations Development Programme