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The Role of the
Private Sector in Development |
I am going to focus
this speech on Corporate Social Responsibility (CSR) issues relating to
the developing world, given that I specialise in Overseas Development in
the European Parliament.
I find it a great irony that there is still a lack of recognition by
political decision-makers around the world of the huge positive impact
Multinational Corporations (MNCs) can and already DO have on international
development.
MNCs in multilateral global trade are responsible for 70 % of world trade
activity. The top 200 MNCs have a combined turnover greater than a quarter
of the world's economic activity and greater than the annual combined GNP
of 180 countries. This amounts to some 28% of world GDP. With world GDP
amounting to around 33 trillion US Dollars, that's a staggering 9.24
trillion USD of combined turnover. It is a telling observation that, of
the worlds hundred largest economic entities, 51 are corporations and
only 49 are countries.
It is therefore a great irony that there is still a lack of recognition by
the public and by political decision-makers around the globe of the
immensely positive role these International Corporations can and already
DO play with regard to development.
There is a growing perception among enterprises today that sustainable
business success and shareholder value cannot be achieved solely through
maximising short-term profits, but instead through market-oriented yet
responsible behaviour. Companies are aware that they can contribute to
sustainable development by managing their operations so as to enhance
economic growth and increase competitiveness, whilst ensuring
environmental protection and enhancing overall social standards. In this
way, they demonstrate and promote what is known as Corporate Social
Responsibility or simply CSR.
CSR thus spans the three pillars of sustainable development economic,
social and environmental and encompasses a vast field of voluntary
action by business. With regard to today's particular focus, "The
Involvement of International Companies in Community Development", this
means that responsible entrepreneurs:
care about and promote the health, safety and general well-being of
employees and their families by supporting or providing, for example,
basic health care or through involvement in local hospital projects etc.;
invest in their workforce through training and personal development
opportunities ('human capital formation') as well as through the support
of educational facilities for family members, especially the children;
act as 'good citizens' in the communities where they operate by
observing international transparency and accountability standards; and
are respectful of natural resources and the environment.
CSR is all about voluntary business engagement, going beyond legislative
requirements. Going beyond legislation implies respect for the law and
compliance with existing applicable - national and/or international -
regulation. In this sense CSR is a complement to legislation. CSR is about
responsibility, not just compliance. If, in this way, CSR is conceived as
a means of self-regulation by business, it can also pre-empt the need for
new legislation and help minimise regulatory burdens for business. After
all it is business that creates wealth and jobs as well as products and
services for the community. It is therefore the role of public authorities
to create the right framework and incentives for entrepreneurs, be they
large-scale MNCs or a small local firm, to fully exploit their creative
potential in a socially and environmentally responsible way.
Given the force of MNCs in world trade, it would be absurd for Governments
and politicians to ignore the substantial impact these companies can make,
especially in developing countries - in partnership with local enterprises
and civil society - by creating a NEW Enterprise development framework to
eradicate poverty, ensure basic health care and education, and promote
sustainable development.
Let me elaborate on what I mean by this new architecture and how it can be
implemented in practice: In my report on trade and development for the
European Parliament, I have developed the idea that MNCs should set up
'Ethical Investment Committees', similar to the Audit and Remuneration
Committees which already exist in such companies. These Ethical Investment
Committees would report to the board of directors, the shareholders and
those directly affected by the GLOBAL activities of the MNC, on the
implementation of the OECD Guidelines for Multinational Enterprises (of
27th June 2000) and the United Nations Global Compact (launched by Kofi
Annan in 1999 at the World Economic Forum in Davos), both of which provide
robust sets of recommendations for responsible corporate behaviour
world-wide.
These Ethical Investment Committees should also be tasked to identify
local Enterprise Development projects as 'Offset projects', which the MNCs
can invest in, thereby actively fostering community development. This
should be done in conjunction with local NGOs and other civil society
actors, so as to ensure that these projects have a high component of
social, economic and environmental capacity building.
I believe that MNCs should be encouraged (not obliged!) to commit as a
minimum investment at least 0.7% of their gross turnover into new local
investments (as Offset projects) each year in the developing countries in
which they operate. Considering that, as I outlined earlier, the combined
gross turnover of the world's largest 200 MNCs adds up to over 9 trillion
USD, a 0.7% contribution would come to about 0.065 trillion or 65 billion
USD worth of well-spent overseas development assistance (ODA) every
year!!!
This would be more money - from the 200 largest MNCs alone - than the
entire world community is spending on ODA at the moment, which is a mere
50-60 billion USD - as opposed to an absurd $900 billion spent on military
expenditure and 300 billion on agricultural subsidies world-wide.
I think it becomes clear that this "New Architecture of Enterprise
Development" would be the most effective and result-oriented form of
community development one could possibly wish for!!!
More and more governments - as well as NGOs and civil society
organisations - are coming to the conclusion that only private enterprise
has the energy and capacity to mobilise enough finance, inventiveness and
expertise to lift people out of poverty by empowering them to make a good
living for themselves and their families. As the UN's Commission on the
Private Sector and Development stated in a recent report, "the savings,
investment and innovation that lead to development are undertaken largely
by private individuals, corporations and communities."
It is slowly starting to sink in that the developing countries'
governments - with the support of the United Nations, the international
donor community, and development agencies - must find better ways to
attract foreign investors and to foster local private industry, especially
SMEs - the backbone and driving force of any economy and the big companies
of tomorrow.
Development institutions and government officials are beginning to
recognise what the private sector has to offer: while public sector
development assistance is between 50-60 billion USD, the private sector
offers between 600-700 billion in cross-border capital flows.
It is a shock to realise that the golden age of financial globalisation
ended in 1914 when British capital equivalent to 5% of host-country GDP
flowed out each year to the United States, Canada, Australia and
Argentina. Then, for nearly half a century, from the Depression until the
1970s, international flows of private capital dwindled to almost nothing.
In the 1970s, net flows of private capital to the worlds poor countries
amounted to a little over 1% of host-country GDP. This trickle was
sufficient to finance a miserly one-twentieth of what many poor countries
spend on investment (and an even smaller share of what they should be
spending).
Taking one decade with another, flows in the 1980s were about equal to
flows in the 1970s; during the 1990s, they were substantially larger. By
the end of the 1990s, annual flows as a proportion of developing-country
GDP were some three times bigger than in the 1970s.
At the end of 2001 the worldwide stock of cross-border bank loans and
deposits was $9 trillion. Of that, only around $700 billion was
attributable to developing-country borrowers. The stock of global
cross-border investment in securities was some $12 trillion, of which
developing-country borrowers accounted for just £600 billion. As in the
19th century, moreover, most of the capital exported by rich countries to
poor countries still goes to just a handful of recipients.
MNCs could, as I have indicated, add a massive amount to that sum through
voluntary investments - of, for example, 0.7% of gross turnover - into new
local projects (as Offset projects) in the developing countries. This
could lead to an additional 65 billion USD worth of well-spent overseas
development assistance (ODA) every year from the world's largest 200 MNCs
alone.
In the United Kingdom, politicians - and especially the Conservatives, who
have always recognised the power of the free market - have for a long time
now embraced the private sector's engagement in the developing world. We
view Corporate Social Responsibility as business' contribution to the UK's
sustainable development goals, with its aims of social progress, effective
protection of the environment, prudent use of natural resources and high
and stable levels of economic growth and employment to ensure a better
quality of life for everyone, now and for generations to come. We expect
our businesses to be committed to the values of Corporate Social
Responsibility, and to make them part of their corporate identity.
The European Union has been following the UK's model, and is increasing
its efforts on CSR. To this effect, it has recently set up a European
Multi-Stakeholder Forum, aiming to promote innovation, transparency and
convergence of CSR practices and instruments throughout the European
Union.
The private sector's involvement in the developing world is of course no
philanthropic act. Business - as well as national governments - have a
vested interest in pursuing business opportunities in developing
countries, given that these are the markets where they can expect the
fastest growth over the coming decades. Apart from the direct economic
advantages for both sides, and the positive effect this would have on the
stability of the international capital markets system, a further
engagement of the private sector in the developing world will also boost
international security by narrowing the gap between rich and poor, a gap
which is responsible for a lot of today's hatred and the willingness to
commit acts of terror.
But of course for this to work and not to backfire, companies will have to
comply with international CSR standards - an area, which still requires a
lot of work and close co-operation between both business and politics.
However, it is not only the international corporations that should have to
comply with common rules and standards - the developing countries'
governments should also be encouraged to fulfil certain conditions,
conditions generally referred to as 'Good Governance'. In order for CSR to
work and to lead to sustainable development, the host government has to
work towards achieving some form of Good Governance. The term refers to
the effectiveness of government and is widely understood as the competent
and honest management of a country's resources in a manner that is open,
transparent, accountable, equitable and responsive to people's needs. As
the UNDP rightly points out, "good governance and sustainable human
development are indivisible. (...) developing the capacity for good
governance can be - and should be - the primary way to eliminate poverty."
Here is where the members of the international donor community (G8, UN,
etc.) come in: they will have to make the achievement of Good Governance,
or at least the developing countries' visible commitment towards reaching
it, a condition for closer development co-operation, in order to exercise
a gentle pressure on the developing countries to pursue:
Accountability, which includes civil liberties and political stability;
Government effectiveness, which includes the quality of policy making
and public service delivery;
The Rule of law, which includes protection of property rights;
Independence of the judiciary; and
Control of corruption
It thus becomes clear that a close co-operation between the international
companies, the international donor community, and the governments of
developing countries is essential in order to make Corporate Social
Responsibility work and to enable sustainable development to reach
throughout the world.
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