Inequality as risk: Davos 2014

What should business do about inequality?

Global patterns in income disparity between richest and poorest topped the agenda for global business and government leaders at Davos last week.

Expert respondents to the World Economic Forum's 2014 Global Risks report cited income inequality as the risk most likely, over the coming decade, to cause significant global disruptions, volatility and harm.

Many of the statements and media reports from Davos pointed out the (fairly obvious) 'business case' for paying attention to growing inequality: that at least for serious, longer-view businesspeople it is not merely a moral social issue but also a core strategic commercial  issue.

This is so both in terms of social and political risks, and opportunities to expand and deepen consumer markets. Very unequal societies exhibit distorted and uneven growth patterns, especially in terms of more broad-based demand. Especially for consumer-focused firms, the issue thus belongs not just to sustainability or CSR policy but to hard business strategy. In addition, as is clearly evident in parts of Africa today, as inequality becomes more tangible and visible it places governments under pressure. They respond by rolling out the sort of knee-jerk populist taxation and other policies that are anathema to business planning, rather than pursuing sustainable programmes to distribute some appropriate portion of wealth and to support those, especially the less privileged, who may seek opportunities to improve their economic status.

Conventional views would hold that the business of business in society is to help the economy grow, including by employing and taxpaying. It is then for government to redistribute some of the proceeds of growth in order to reduce any inequality that results. Beyond this basic role-division is the concept that if it is concerned about (the consequences of) insufficient action to address inequality, business can collectively lobby government to apportion taxed funds to doing so.

But what about a less conventional role -- business helping African governments not only to tax more effectively, consistently and fairly, but also to spend the proceeds more effectively in addressing social ills like income inequality?

At first glance it is assumed that businesses are not interested in having a more effective taxman. Yet in previous posts (especially here last May, also here) I have discussed the initially counter-intuitive idea that businesses can help strengthen their own regulator. Either by sector or in some other collective, representative grouping, firms with longer-term horizons in the region can and should explore ways to help governments build the capacity to assess, plan and execute social policy. Even a single firm (for example, the dominant mining firm in a single-commodity country) can do so: although this increases the risk of the firm 'capturing' the state, other institutions can be brought in to triangulate the relationship. These sorts of partnerships would at least give more meat to the rhetoric that public-private partnerships (PPPs) will transform Africa's economic and social development.

Last week's post on 'Africapitalism' reflected on the role of business in Africa in promoting inclusive growth -- not just calling for governments to ensure it.

Low or compromised state capacity in Africa impairs the state's ability to tax fairly and consistently, and to deploy and distribute those resources. In such settings it is perhaps not enough for firms to argue that they pay their dues and nothing more can thus be expected of them. It would be good (socially valuable) of business instead to look for ways to help the state make better use of taxed funds, including to promote programmes to boost incomes and income-generating capacity for lower earners and the poor. It would be smart and strategic for business to do so, too.

Jo

See an earlier post on PPPs, and on corporate responsibility and taxation -- including the view that strategic firms might help strengthen their tax authority: here.

The WEF's 2014 Global Risks report is here.

See for example this organisation dedicated to the role of business in addressing inequality.

Postscript: see Tobias Webb's post last week, also on Davos, and also on practical ways for business to help tackle inequality as part of a strategic approach.

'Africapitalism': the business of development

The idea is appealing that business, done differently, can transform Africa's social development path in ways that generations of aid have not.

 

This first post for 2014 responds to an interview last week with Tony Elumelu on his concept of 'Africapitalism'.

I discussed this in a post ('Doing good by doing well') last year: here.

 

The Africapitalism notion attempts to grapple with something that is, of course, partly a subset of broader global debates on fostering new, more moderate strains of capitalism. These debates inevitably involve argument on the appropriate role of the state in generating and/or distributing wealth; in Africa's case we certainly see today a hunger among policymakers (and donors) for new meta-models of the developmental state that balance various imperatives.

Whatever the merits of Elumelu's own ideas, it is hard to think of a more significant topic in contemporary Africa than something implicit in the Africapitalism concept: inclusive growth. Despite current headlines on ethnic and religious conflict, for the vast majority of the continent's people the big issue of the day is securing a material share in Africa's rise: reconciling the good-news story of Africa's fast-growing economies with the realities of often markedly increased inequality, stubborn unemployment, and persistent developmental problems. For this reason alone, the catchy term is a welcome addition to the 'Africa Rising' debate.

'Africapitalism' is not just an alternative to traditional aid programmes -- although traditional donors are certainly now explicitly looking to harness both the private sector's contribution to development goals, and the developmental impact of fostering a local private sector (see various previous posts). Instead, Elumelu's concept would seem to suggest that wealth-creation by the private sector must be done differently in Africa if it is to have any meaningful impact on the continent's development. Implicit in that is acknowledgment of the risks of non-inclusive growth. This is because social and political conflict in Africa can be something that happens because of fast growth, not despite it.

 

To my mind, also implicit in the concept is not just risk but opportunity: at first glance, 'Africapitalism' connotes in my mind the idea that because Africa's economic rise is relatively recent and still very incomplete, scope exists to shape a form of free enterprise that avoids the less desirable manifestations of capitalism experienced in the developed world. Or are we already a half-decade or more too late, given entrenched structural patterns especially around resource extraction, to conceive of this as a vast laboratory (if that is an appropriate mindset) for a form of capitalism that is more inclusive without stifling private incentive?

Is 'Africapitalism' about using the fruits of hard, conventional business to create social value (for example, sponsoring skills-acquisition or entrepreneurialism)? Or is it about an altogether different tone of business activity to begin with, one that is explicit about social contributions and is pursued according to certain ethical, social and environmental criteria? Ideally, there is no trade-off between 'hard business' and 'tree-hug business' -- ideally an ethical business model creates social value in various ways beyond job-creation and tax-paying while also generating the hard results (profits) that can then also be the basis for philanthropy.

 

Elumelu describes Africapitalism as a "middle point between business and philanthropy", although later he talks of "catalytic philanthropy". That would suggest an approach using the fruits of conventional business activities (like Elumelu's to date) to sponsor programmes supporting economic self-reliance and prosperity. If so, the approach is not radically different in conception to aid donors' private sector development and economic empowerment programmes.

Elumelu seems to suggest something more than catalytic philanthropy, although it is not entirely clear what. Investment in social infrastructure (in his case, electrification) may sometimes both make business sense and have massive developmental benefits, but does 'Africapitalism' mean no more than freeing up the private sector to provide Africa's public goods?

If so -- and whether one agrees or not -- missing from Elumelu's ideas is a clearer outline for the role of the state. He suggests that the private sector must lead Africa's development, and the public sector simply provide an enabling environment for that; beyond that, he suggests in the interview, "what is good for business is good for people".
 

What is needed is discussion reconciling this approach, which tends to imply a belief that wealth will 'trickle-down' to wider society, with contemporary discussions and patterns of taxation in Africa. Those discussions, and the models in favour in much of the continent, posit a central developmental and distributional role for the state, not the 'light and steering hand' that Elumelu seems to suggest.

Business may assume greater responsibilities, but how much serious developmental benefit is possible without a more capable state alongside? How is such a state to be built or reformed? If Africapitalism is to be more credible -- and so get the momentum and uptake this potentially inspiring notion deserves -- it needs to address this issue. Traditional donors were not just being old-fashioned in supporting governance reforms: they understood that the state (still) matters.
 

Jo