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Can Business Alleviate Poverty & Make Profits by pptfiles

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									8th International Conference on Corporate Governance
Regents College Conference Centre, Regents Park, London September 20-21, 2007

Creating a Better World through Corporate Governance

Paper Presentation

Can Business Alleviate Poverty & Make Profits?
by

Prof. Poonam Kumar
Chairperson, Mega Ace Consultancy India | U.K.

Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

Distinguished members on the panel, ladies and gentlemen, it gives me a great pleasure to be amongst you at the 8th International Conference on Corporate Governance to share my thoughts on one of the most important questions which stares us straight in an era of rapid globalisation. Can Business Alleviate Poverty & Make Profits? To anyone cynical, the answer would be a big ―No‖. One could argue that businesses can either make profits or can alleviate poverty, it cannot do both. It is this idea of the limited possibilities of business as a poverty alleviating agent that has been the basis of a socialistic economy. In developing countries, enterprises of the state sought to shoulder the responsibility of poverty alleviation. Have these institutions been successful? Many of us in the private sector may argue that they have failed miserably. However, some of us will agree that these institutions achieved some degree of success although limited in proportion to what was expected of them. Even today in many economies around the world, the public sector continues to play a highly important role and has proved to be the primary engine of growth and development. Whereas the social good, was at the core of all public sector initiatives, the private sector has always been about value creation- producing goods and services valued by consumers, and delivering profits for shareholders. It is widely believed that emerging nations would move the world economy by the mid 21st century. The importance of emerging economies can be gauged from the fact that in the year 2005, they accounted for more than 45 percent of global GDP on Purchasing Power Parity (PPP) basis. Developed economies

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Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

are no longer the dominant player in today's global world. The influence of developing and emerging nations on developed countries is of greater significance today than it ever was. These countries over the years have been increasing their share of global GDP in an impressive way. The rate of growth of GDP in these countries has also been phenomenal with the help of multilateral trade and availability of low-cost skilled manpower. Emerging economies have registered higher GDP growth rate which far surpasses the growth rate of developed economies. By the year 2040, Chinese GDP is forecast to surpass US GDP. Similarly, by 2040 India can expect to surpass the Japanese economy. Emerging economies accounted for more than 80 percent of global population and more than 60 percent of foreign exchange in 2005. Energy consumed by these nations was more than 45 percent of global energy consumption for a 40 percent of total global exports. In terms of stock market capitalisation, emerging economies had a share of more than 10 percent of global stock market capitalisation. These economies have accounted for more than fourfifth of growth in oil-demand in the last five years. Brazil, Russia, India and China are the four biggest emerging economies, together accounting for two-fifth of the total GDP of all emerging economies. Both China and India, representing two of the most ancient civilizations are often referred to as Asia‘s giants, together account for nearly 40 percent of the world‘s population. This is true in purchasing power parity terms, but in current dollars Brazil and Russia both produce more than India. At market

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Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

exchange rate, only China and Brazil rank among the world's top ten economies, but in purchasing power terms all four make it among the top ten. In the past five years, annual growth in emerging economies has averaged at almost 7 percent, fastest in recorded history as compared to 2-3 percent in rich economies. According to the International Monetary Fund (IMF), emerging economies are expected to grow at 6.8 percent a year in the coming 4 years. If this rate of growth is continued for coming 20 years, emerging economies can account for two-thirds of global output [in terms of PPP]. Demographically speaking China is not dissimilar to those of the leading developed countries. With birth rate seeing a steady decline and life expectancy continuing to rise, the trend is towards a decline in the number of children and young adults as well as a big increase in the number of middle aged and elderly. This means that economic growth could slow due to slow growth in the labour force. Further privatization could lead to more productive investments and, hence, faster productivity growth. Also, an older population could eventually lead to a lower personal savings rate. On the other hand, in India, the population is much younger and continues to grow more rapidly. India thus may possess a window of opportunity for a few decades during which its growth could accelerate due to accelerated labour force growth. This depends crucially, on having sufficient economic flexibility to allow for the creation of millions of new jobs. The real challenge before India and many other emerging economies is the objective of achievement of ‗inclusive growth‖. Growth with equity has been

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Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

the mantra of the Asian tigers during the three decades to the 1990s. Unlike Latin America, most of the countries in the Asian region have combined speedy economic growth with relatively low and sometimes even falling income inequality, thereby spreading the economic gains widely. More recently, Asian economies have continued to enjoy the world‘s fastest growth, but the fact remains that the rich are now growing richer much faster than the poor. According to a recent study by the Asian Development Bank (ADB), income inequality in Asia has increased over the past decade or so in 15 of the 21 countries. Although emerging nations are attractive destinations for investment, they face some challenges such as (a) Need for Sustainable Development; (b) Challenge to Build Capabilities; (c) Lack of Political Stability; (d) SocioEconomic Underdevelopment; (e) Infrastructural Bottlenecks; (f) Capacity Development; (g) Civil Society and Governance. After decades of operating in a closed economy, spurred by initiatives of the government, Indian businesses are starting to spread their wings. Enthusiasm for wealth creation is replacing the long held attitude of suspicions regarding capitalism and free markets post colonial liberalisation. According to Think London, U.K.‘s capital inward investment agency, Indian owned businesses now account for 5 percent of the London economy, employing 49,000 people with an annual turnover of US $ 14.5 bn. India is also the 7th largest inward investor in U.K. Indian manufacturing and software companies have made acquisitions in South Korea, Singapore, the U.S, Australia, Germany and the U.K. trade flows are surging and an increasingly confident private sector is earning more money from abroad - India has found its way to play a wider role in the global economy.

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Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

Coming back to the core issues of poverty alleviation; there are a few facts which I believe set the stage of further discussion on whether businesses can indeed alleviate poverty even as they make profits? Some facts about global poverty which may be worth reflecting upon are:  Half the world — nearly three billion people — live on less than two dollars a day.  The GDP (Gross Domestic Product) of the poorest 48 nations (i.e. a quarter of the world‘s countries) is less than the wealth of the world‘s three richest people combined.  Nearly a billion people entered the 21st century unable to read a book or sign their names.  Less than one percent of what the world spent every year on weapons was needed to put every child into school by the year 2000 and yet it didn't happen.  51 percent of the world‘s 100 hundred wealthiest bodies are corporations.  The wealthiest nation on Earth has the widest gap between rich and poor of any industrialized nation.  The poorer the country, the more likely it is that debt repayments are being extracted directly from people who neither contracted the loans nor received any of the money.  20 percent of the population in the developed nations consume 86 percent of the world‘s goods.

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Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

 The top fifth of the world‘s people in the richest countries enjoy 82 percent of the expanding export trade and 68 percent of foreign direct investment — the bottom fifth, barely more than 1 percent.  In 1960, the 20 percent of the world‘s people in the richest countries had 30 times the income of the poorest 20 percent — in 1997, 74 times as much.  A few hundred millionaires now own as much wealth as the world‘s poorest 2.5 billion people.  The 48 poorest countries account for less than 0.4 per cent of global exports.  About 0.13 percent of the world‘s population controlled 25 percent of the world‘s assets in 2004.  It is often noted that more than 50 per cent of Americans are shareholders. However, it is also true that 10 per cent of Americans own about 80 per cent of the stock. In Latin America, 2 or 3 per cent could easily hold 90 per cent. So when we talk about 'maximizing for the value of the shareholder,' we are talking about enriching the rich. As the above facts reveal, the gaps are obvious in the wealth pyramid. The number of people living in poverty at the bottom of the wealth pyramid, versus the relative handful at the pyramid's peak, represents what is potentially the most explosive socio-economic challenge facing the world today. Many companies now see the possibilities of undertaking traditional value creation activities - from sourcing to engaging the poor in production to distribution and sales - in low-income markets thus collectively representing a massive business opportunity. As noted in the report on the ‗Global Conference on
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Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

Social Responsibility‘ held on February 16 to 18, 2006, throughout history companies that made money such as Ford, Rockefeller, Waltons, Kodak, Walmart and Microsoft had one thing in common: they all moved their business goal post to serve the poor markets, what Professor C. K. Prahalad calls the Bottom of the Pyramid. John D. Rockefeller‘s slogan at Standard Oil was ―Let the poor man have his cheap light.‖ George Eastman of Kodak‘s slogan was ―a camera for everybody‖. Bill Gates vision was ―computing for everyone‖. The ability of private enterprises to empower the poor either by improving their quality of life providing them with productivity tools and services, developing skill-sets or creating jobs- that is where the goals of poverty reduction and economic profit can align. It is this shift that we see in a new understanding about the ―customer‖ that is the most invigorating aspect of modern day business paradigms. With markets in the developed economies experiencing slow growth and with the top tiers in emerging markets relatively small, businesses are beginning to eye the huge potential that lies at the bottom of the pyramid, as a viable and essential market. Indeed, it is only in the last decade, that businesses have come to realise that BOP individuals, multiplied several times over, represent a significant purchasing power. With this realisation has come some dramatic shifts in business thinking, sparking innovative experiments involving marketing approaches, distribution networks, product packaging and financing instruments to meet the needs and requirements of very poor customers. Poverty relates to deprivation arising due to the lack of financial resources and the lack of skill capacities to change the socio-economic background of ones

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Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

existence. Governments and social development bodies have always sought various mechanisms to empower the poor with financial resources. But does this mean continuous feeding the poor with food; providing them with shelter or clothing? Does it mean huge donations be given to certain segments of society seeking to alleviate poverty and provide them support? Should this be a continuous process and they need to be given this support though their entire life. Would this really help in alleviating poverty? Or are we talking of supporting this segment through empowerment with education, helping them develop skills, providing a good environment and living conditions. Are we talking of giving them equal opportunities, supporting and encouraging them not just to earn a living but also providing them opportunities for growth, helping them survive and thrive in a competitive global world business. The main cause of increased inequality, especially in China as provided in the ADB study referred above points to the differing fortunes of rural and urban households. Productivity – and hence income- is growing much more slowly in agriculture, on which most of the poor depend, than in manufacturing or services. Another important factor for the increasing disparities is the widening gap between those with and without skills. However, the shift from socialism to a market economy in China and India has increased the financial benefits of education. Across Asia, the opening up of economies also means that some high-skilled workers are now paid more in line with international rates. It is clear that Asia‘s poor have not been bypassed by growth. Even where inequality has increased sharply, the poorest 20 % of households are still better

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Can Business Alleviate Poverty & Make Profits? Prof. Poonam Kumar

off in real terms than they were ten years ago. For instance, the share of India‘s population living on less than US $ 1 a day fell from 42 % in 1993 to 35% in 2004. China saw a sharper fall, from 28 % to 11 %, largely thanks to faster growth. But even if poverty has continued to fall despite rising inequality, it may not have dropped as fast as it might have if economic gains had been more equally distributed. The ADB report recommends that the governments focus on policies that lift the incomes of the poor, such as improving rural access to health, education and social protection. More investment in rural infrastructure could boost productivity in farming and increase job opportunities for the poor. But that is easier said than done, as Rajiv Gandhi once remarked that only 15 % of government money intended for India‘s poor ever reached them as most of it leaks out in bureaucratic incompetence or corruption. To my mind, donations and subsides can only provide temporary relief to the poor, but making them equipped with new skill-sets and ensuring that the private sector opens up new opportunities will help the poor to help themselves secure sustainable livelihood. These efforts will not just last forever but can produce huge financial as well as social benefits in the long run. We are looking at the world today where the movement of people, capital, goods and services has become easy with little or no barriers. We are today global citizens and the policymakers and businesses alike are focusing on how opportunities for growth and empowerment can be delivered to people at the grassroots across the global. In fact enhanced job creation and getting the youth to be productively employed will help us sort some of the grave issues such as

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insurgency arising from socio-economic backwardness being faced by various countries. Make poverty history is a compelling slogan and converting it into a measurable commitment is the logic behind the Millennium Development Goals (MDGs), set by the world‘s leaders at a United Nations in 2000. The goals claim to convert campaign slogans into bankable pledges, complete with a number and a date. The world has, for example, resolved to cut the rate at which mothers die from child-birth by three-quarters from 1990 to 2015 and the percentage of people without safe water will fall by half; infant mortality by a third. These and others objectives are what the MDGs seek to achieve. However, is the government responsible to alleviate poverty or is it business that can achieve this objective? Can poverty alleviation be achieved by either one of them or does it require a partnership approach between the government machinery and business entities? Poverty can only be truly addressed if we meet certain conditions, which include having a huge scale to reach the billions who are in poverty; providing efficient solutions that endure over generations and are truly effective in making a difference. Business strategists today believe that it is only through a commercial approach that these objectives can be achieved. Today, no business or individuals around the global can ignore crucial issues such as dealing with climate change or the importance of ensuring the safety as well as the emotional and physical well-being of people at every strata of

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society. More practically the youth which has lots of energies need to be employed productively. Thus it is only businesses that can ensure that the real skills are developed among youth on a continuous basis either through the setting up of training centres or technical schools for the development of suitable and employable human resources. The success of any business lies in its ability to ably use resources and in turn further create an environment for growth. Thus business needs skilled human resources and they in turn need to develop suitable skills among these resources. When new skills are created, business tends to profit from these skills that they have created. Examples of such initiatives can be seen among companies like Infosys which has taken the lead in initiating training programmes to enable qualified engineers from socially disadvantaged sections to get jobs on merit in top companies. Thus there is no contradiction between social impact and good profitability; in fact profitability is central to achieving the objective of social well-being. Though it has been seen that globalisation has helped emerging economies distribute their products and services around the world, there has been no systematic way in which this extra wealth can be linked to spur poverty alleviation. To generate profits companies need to tap at the huge potential of the market at the base of the pyramid. However, there are challenges that they face. Firstly, there is the issue of cultural distance between corporate decision makers and the poor. Secondly, a crucial challenge that businesses face is a serious lack of infrastructure in markets among the poor. Companies are also challenged to find ways to bring their initiatives in these markets to scale within the time frames dictated by traditional corporate targets. It is here that their success depends on the support they receive from governments, multilateral donors,

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and non-profit organizations. Companies focusing on markets among the poor must create social value in the areas where they operate to ensure long term sustainable success and profits even as they seek to achieve profits. Global experience shows that businesses that have merely focused on making profits and ensuring good performance in the stock markets without creating longterm sustainable value in the environment in which they exist have failed miserably. Strategists also feel that to minimize negative public perception, companies must be willing to publicly address the issue of profits, work collaboratively with NGOs and governments, and also measure and report on the social value they are creating for the poor. The approach thus has to be towards developing a partnership with the government as a facilitator assuming the role as an investor, regulator or guarantor. Government partnerships are essential for companies that may be seeking to build new markets where existing infrastructure is weak. In addition, to create a secure environment for business to operate, governments must play a role in helping companies to provide socially beneficial infrastructure services such as clean water, sanitation and healthcare, by subsidizing service provision to certain consumer groups, or by providing the seed funding necessary to reduce cost structures and generating the incentives for business involvement. Companies operating in this segment should not look to the poor merely to exploit their untapped purchasing power or dip into low-cost labour pools. Our experience while handling consulting assignments globally particularly among small business enterprises has been the need to create capacities at the Bottom of the Pyramid. It is important for companies to back them with the development of necessary skills so as to ensure that they are not only financially

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secure but are able to achieve productive growth. A positive trend among leading and globally admired businesses is to set and adhere to minimum standards for labour, the environment, human rights and the adoption of various social and community initiatives. Although it may increase the cost of doing business, businesses have nonetheless taken the lead here, and strong governance norms are emerging in this sphere. On the other hand, it can be argued that spurred by the impact of globalisation governments need to prepare a blueprint to use the wealth and resources created to help people escape poverty. Thus it can be argued that good corporate governance is essential for ensuring an economic mechanism that is conducive to continuous economic growth, the creation of employment, technological progress and the development of vibrant, sustainable and responsible international business commerce.

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