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Problems Arising From Income Inequality In Our World Economics Essay

Corporate social responsibility is for companies to set desirable policies by themselves considering the goal and value of society concerned make a decision and put them into practice (Peter Drucker). It also means to unfold the business activities in a comprehensive way in the economic, environmental and social field for sustainable development.

In effect, there have been some academic controversies over corporate social responsibility. On the other hand, both negative and positive perspectives over social responsibility were raised while the position adjusting both perspectives were also raised (Lee, Sang-min, 2004).

In general, neo-classic economics take strong negative perspective against corporate social responsibility. They think that companies can contribute to society by maximizing their profits and improving their efficiency, reducing the costs. In other words, maximizing shareholders’ profits is the major role of companies. As M. Friedman once mentioned in 1970, companies’ key role is to generate economic performance. On the other hand, stakeholder theory takes positive perspective towards corporate social responsibility (Johnson, 1971). With the development of capitalism in the 20th century, the influence of companies has increased with its growing size. Therefore, they should serve their own role as members of society. From the long-term perspective, when companies avoid any social demands, such avoidance turns out to be the costs of overall society, thereby expanding the spending of business costs. Considering this, development of society will be beneficial to corporate development as well. (Carrol 1999)

The recent dominating view is that economic performance and social performance of companies should be dealt in the same context, rather than in a separate way. According to these opinions, shareholders profits can be also beneficial to stakeholders. Therefore, the ultimate goal of companies is to pursue profits while that should be focused on maximizing long-term profits rather than the short-term one. Socially responsible companies will give more profits to shareholders.

Building a trust with consumers is an important element to determine the fate of companies. That is because business confidence serves an important role in consumers’ decision making in product purchasing. When companies lose consumer confidence, it will directly affect share prices, aggravating profits and threatening long-term existence of companies. Given this fact, it is a sure thing that market value and brand value of companies can be enhanced only when companies fulfill their social responsibility.

2 (a) WHAT IS INCOME INEQUALITY

The extent of disparity between high income and low income households, the measure used is the ratio of the 80th percentile to the 20th percentile of the equivalised disposable household income distribution (i.e. the ratio of a high household income to a low household income, after adjusting for household size and composition). The higher this ratio, the greater the level of inequality.

Relevance

The degree of income inequality is often regarded as an important aspect of the fairness of the society we live in. A high level of income inequality may also be detrimental to the level of social connectedness across society (Adolescent Health Research Group, 2008).

Causes of inequality

There are many reasons for economic inequality within societies. These causes are often inter-related. Acknowledged factors that impact economic inequality include the labor market, innate ability, education, race, gender, culture, wealth condensation, development patterns and personal preference for work, leisure and risk.

Evolution of inequality

According to the same measure, inequality in the U.S. is higher than in other developed countries (the same is true for the Gini measure):

The graph below is according to yet another measure:

The graph above points to a negative trend in the sense of increasing inequality. The same can be seen in the Gini measures

The situation in the U.S. – one of the highlighted cases in the graph above – is also illustrated by the graph below (sharp increase of the top incomes):

Here are some numbers on income inequality in Africa:

2 (b) PROBLEMS ARISING FROM INCOME INEQUALITY

The argument, however, that equality of outcome – or, at least, the absence of extreme inequalities – derives from the intrinsic value of equality of opportunity is not the same as claiming that equality of outcome itself has intrinsic value. Fairness as embodied in equal opportunity is good, but it is not all that is good in relation to economic equality. Even leaving aside the argument (noted above) that follows from defining economic well-being and basic needs in relative terms, there are strong reasons to view equality of outcome as having intrinsic value.

This intrinsic value of equality of outcome is well captured in the Sheffler quotation above, that “there is something valuable about human relationships that are …unstructured by differences of rank, power, or status.” Sheffler is not directly addressing differences of income and wealth. Yet, while it is conceptually possible to have differences of income and wealth that are not accompanied by differences of “rank, power, or status,” this seems highly unlikely, to say the least, in the real world.

A similar idea is expressed by Erik Olin Wright (2000, p. 145): “income inequality fractures community, generates envy and resentment, and makes social solidarity more precarious.” The pernicious impacts of income inequality that concern Wright depend at least in part on the origins and degree of the inequality. If, for example, the inequality is largely based on race or ethnicity or gender, as is so often the case, then it will be generally perceived as unfair (except, perhaps, by those at top) and generate considerable resentment. Similarly, when inequalities are seen as arising from family privilege, they will tend to be viewed by many people as illegitimate and unfair. Income inequalities that are seen as arising from differences in skills or efforts are less likely to be viewed as illegitimate (the views of Rawls and some other liberal egalitarians notwithstanding). Nonetheless, if inequality is large as it is in much of the world today, it is likely to be viewed as unfair – and thereby undermine social solidarity – because few people would view legitimate bases of inequality (e.g., differences in effort) as generating large inequalities.

Thus the intrinsic value of relative economic equality (of outcome) exists because it is a foundation for the type of social relations that we consider desirable – relations of solidarity, trust, and amiability. In this sense, the value of relative equality can be seen in terms of its role in creating and being part of a democratic social order. The connection between relative equality and the social relations of a democratic social order is so intimate that the equality is really part of those relations, not an instrument that generates their existence. (As we shall see, however, equality and the social relations that go with it is an important instrument for a set of positive social outcomes. Also, but beyond my scope here, they are an instrument as well for the effective operation of political democracy.)

2 (c) WHO DOES THE PROBLEMS AFFECT?

Various things can create inequality. Most common generalizations will be things like greed, power, and money but even in societies where governments are well-intentioned, policy choices and individual actions (or inactions) can all contribute to inequality. In wealthier nations, the political left usually argue for addressing inequality as a matter of moral obligation or social justice, to help avoid worsening social cohesion and a weakening society. The political right in the wealthier nations generally argues that in most cases, western nations have overcome the important challenge of inequality of opportunity, and so more emphasis and responsibility should be placed on the individual to help themselves get out of their predicament.

Both views have their merits; being “lazy” or trying to “live off the system” is as abhorrent as inequalities structured into the system by those with wealth, power and influence. In poorer countries, those same dynamics may be present too, sometimes in much more extremes, but there are also additional factors that have a larger impact than they would on most wealthier countries, which is sometimes overlooked by political commentators in wealthy countries when talking about inequality in poorer countries.

3. ROLE OF THE COMPANIES IN ADDRESSING THESE ISSUES

How businesses address these issues depends on many factors, such as industry structure, company vision, size, location and ownership structure. The lessons learned from company experiences can serve as building blocks in achieving innovative, sustainable, and scalable solutions. Companies such as Nestlé, Unilever and CEMEX have shown that through innovative business solutions they can both operate profitably within a given (underdeveloped) institutional framework, and simultaneously directly facilitate the development and strengthening of market institutions. Unilever’s experience with the "Shakti Revolution" in India illustrates that helping to empower underprivileged rural women by fostering entrepreneurship and creating income opportunities can be more important than sales alone, since it encourages the growth of a sustainable consumer base.

3.1 Those companies have a role?

Business models that engage the poor

New business models have focused mainly on cost structure, innovative distribution methods, and logistics, and have ignored the need to develop market institutions. Productive corporate engagement at the BoP will require an in-depth understanding of the meaning of "market based solutions," clarification of the types of markets (informal vs. organized markets); and understanding how companies can connect factor and product markets to help create job opportunities. Companies, particularly large ones, can have a much greater impact on the BoP by contributing to the creation of more efficient markets and by complementing market institutions, rather than just selling products to the poor. In less developed countries, poverty alleviation should be approached primarily through wealth creation, including access to jobs, healthcare, education, and vocational training, even before providing access to consumable goods and services that improve the quality of life of the poor. Of course, wealth creation and consumption are complementary, but there is a hierarchy. In building wealth, business models need to include mechanisms to deal with the following challenges:

Increasing the productivity and real income of the poor.

Enhancing job creation opportunities through direct employment or self employment, supported by products and services that boost productivity.

Moving away from the "traditional consumers" concept to the concept of "productive consumers." (Developing self-esteem and dignity among consumers can be achieved both by creating conditions for employment and by paying decent salaries). (Maria Flores Letelier, 2007)

3.2 What is that role of companies?

The role of MNCs

It is difficult to gauge how many of the 63,000 MNCs (UNCTAD., 2000.) are ready and willing to incorporate poverty alleviation issues into their business strategies. While the relatively small role of MNC's in creating local employment has been well documented, their real contribution may be in setting performance benchmarks in developing markets. These would become the benchmarks that most local businesses would have to meet in order to gain legitimacy and trust in the communities in which they function.

MNCs need to recognize what they do well and what they do poorly in BoP markets. Large companies are typically good at integrating the poor into the global production system and facilitating market transactions for increased productivity as part of their supply chain (Diana Farrell, 2004), but not necessarily at creating jobs through direct employment. But MNCs do have the power to shape institutional environments to be more supportive of job creation, and build partnerships with government, NGOs, international financial institutions (IFIs), and donor agencies. For example, the International Finance Corporation (IFC), the private sector arm of the World Bank Group, has been successfully working with the private sector to engage local businesses in the global supply chain, as illustrated in the articles on its Lighting Africa project and partnership with BP in Azerbaijan.

The role of local companies

Productive engagement with the poor requires new business models that take into consideration both access to local knowledge and issues of trust. Business objectives should go beyond lowering the cost of doing business at the BoP and improving access to customer groups. They should also aim to build legitimacy and good will by tapping into local knowledge and leveraging social capital as a means of gaining access to market intelligence and building legitimacy in the eyes of the poor. Local companies can normally do this better than (and complement) MNCs. Of course, it is difficult to generalize, as some MNCs, such as Nestlé and Unilever, have been present in many emerging economies for decades. Similarly, CEMEX has been very successful in launching an innovative housing program for low-income communities. Partnership initiatives, such as GAIN and UNICA, create space for collaborative action. The GAIN Business Alliance allows both MNCs and local companies to learn from each other, share results, and partner with development organizations. The Brazilian Sugar and Ethanol Industry Association, UNICA, jointly with the World Bank Institute, launched a capacity development program for sugar producing companies from Sao Paulo, which helps individual companies to incorporate social and environmental issues into their corporate strategy and contribute to community development. (UNICA, 2006)

Local companies are often best positioned to provide goods and services to the poor while at the same time helping MNCs to expand their business at the BoP. For example, the key to Sumimoto Chemical's success has been its partnership with a local Tanzanian company A to Z Textile Mills, which resulted in technology transfer, quality improvement, and creation of local employment for the poor who had no previous experience in manufacturing and wage-based jobs. India's ICICI Bank initiative is based on the assumption that economically viable occupations already exist in most regions of India, and that with proper support even the very poor can almost immediately engage in them without specialized skill building. The key, they have found, is providing access to finance, which ICICI created through creative partnerships between banks and a network of local financial institutions.

Nestlé's Milk District Model illustrates this approach. By providing opportunities for training, education, and a steady income to poor rural farmers in exchange for a consistent milk supply, Nestlé effectively integrated poverty alleviation into a business model that was mutually beneficial: the company has been able to increase its supply of fresh milk and poor communities have benefited from job security, improved nutrition, and a better standard of living. There are many ways in which business can help in opening markets to the poor, ranging from multinational corporations (MNCs) and local small and medium enterprises (SMEs) to corporate foundations, business alliances, and small entrepreneurs from both developed and emerging economies.

3.3 Why have they taken that role?

In recent years, business has played a significant role in alleviating poverty, especially in sectors such as telecommunications, information technology, and microfinance. Certain initiatives in these sectors, such as microfinance in urban Latin America and wireless telecommunication in Asia, have yielded impressive results, creating unrealistic benchmarks against which other corporate programs are being judged. Although businesses have made significant contributions in some sectors, in many others they have been unable to "move the needle" on poverty. (V. Kasturi Rangan et. Al., 2007)

It can be argued that the private sector may have contributed to broadening the gap between the rich and the poor and to environmental degradation, but business has also helped improve the quality of life in many low-income areas. (Ray Goldberg and Kerry Herman, 2007) There have been quiet but strong links among economic growth, innovation, and development. This article is not intended to Nestlé's defend once again the fundamental economic rationale for capitalism and its potential role in alleviating poverty.

Rather it is meant to bolster that premise with current examples and practices and to urge businesses to adopt a more proactive role in the development of markets that benefit the poor. Poverty is an economic, social, cultural, political, and moral phenomenon and we believe it is necessary to address these dimensions in an integrated fashion one that contributes to sustainable global development.

3.4 The role to play, how much is the role of the company? e.g., 100%, 50%, 20% or 0%?

Measuring impact and role of MNCs and local companies: To fully assess effectiveness, it is important to capture economic, social, cultural, and environmental impacts. Measures of success should not be limited to output and profitability indicators but should also take into account issues of equity and the balance between corporate, legal, and social obligations. It is essential to measure social values from the poor's perspective, and to understand what is important for them in terms of quality of life, empowerment, and security. Transparency and accountability must also be part of the initiative since corruption hurts the poor the most (The World Bank Group, 2004). Companies like Unilever, CEMEX and Nestlé, through direct engagement with the poor, reduce the risk of corruption that affects the poor in their daily business transactions when operating in informal markets.

We also need to capture positive and negative cross-sectoral effects as well as improvements in market institutions. There is a growing need for companies, development organizations, and academia to create new models that capture the development multiplier effect. In Nestlé's engagement with poor rural farmers in China, for example, the local banking system benefited when the company provided its new suppliers with cash payments, leading to a new customer base for banks in previously low-income areas.

In the last few years, income inequality has been in the media spotlight. There is widespread concern around the globe that the “rich are getting richer, and the poor are getting poorer.” For example, a recent study by Berkeley professor Emmanuel Saez found that “income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression.” (Emmanuel Saez, 2009) He reports that the top 10 per cent of income earners in 2007 accounted for 49.7 per cent of total U.S. income—“a level higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubble in the ‘roaring’ 1920s.” (Emmanuel Saez, 2009)

3.5 Benefits and problems

Among the problems that most threaten the legitimacy of market capitalism are global poverty and income inequality. However, while these are threats to market capitalism, market capitalism can actually help provide a sustainable, long-term solution to these problems.

Ms. Barry quoted Bill Gates in saying that "the problem with philanthropy is that the money runs out before the problem is solved." In contrast, creating businesses that generate profits while simultaneously lifting people out of poverty is a self-sustaining model.

Experience has shown that it possible to build inclusive, competitive, and profitable businesses that also benefit low-income people. Microfinance is an example: It can provide low-income people with capital to start businesses and at the same time can be a profitable business.

Ms. Barry's company has identified attractive business opportunities in countries such as China, India, and Brazil in areas like agribusiness, decentralized distribution, financial services, and products that build income and assets—like education, health, and housing. Her company works to convince major companies to pursue for-profit opportunities marketing products/services to low-income populations in these countries. The products and services will generate profits for the companies providing them while improving the income of people in these countries. For example:

Agribusiness. Large companies in India like Tata, Mahindra, and others are working with millions of farmers to help them grow and sell products.

Decentralized distribution systems. Avon's experience is mixed. It has developed both good and bad distribution systems. In a good system, poor women (such as the one million Avon women in Brazil) earn two to four times the local minimum wage and become successful entrepreneurs. In a bad system, women only stay for three months and spend half their income on cosmetics.

Financial services. China Mobile is exploring a joint venture with a bank to provide microfinance services through cell phones.

Housing. Cemex, the world's third-largest cement company, offers low-cost modular houses. Cemex is investing $100 million in the project, as it earns the same returns as other projects in its portfolio.

The key to addressing the inequality of income between and within countries is not to decrease the income of the top earners; it is to increase the income of those at the bottom. Such entrepreneurial endeavors as those described can help raise the standard of living of millions of people, while providing attractive opportunities for major companies. At the same time, these entrepreneurial efforts help legitimize market capitalism around the world.

3.6 Benefits: How does it enhance the company? What are the benefits to it?

To better engage the poor, business needs to understand their values, aspirations, and the contributions they can make to value creation for themselves and others. Only limited efforts have been made to change the sometimes deep-seated assumptions that business leaders make about the poor, assumptions that are partly caused by a wide cultural and socioeconomic divide and a lack of direct interaction.

Incorporating poverty alleviation into corporate strategy always requires internal change in companies, and sometimes even redefining organizational values and cultures. These changes may include developing an entrepreneurial spirit for, a clear vision of, and a readiness to support new and risky BoP ventures. Not only it is necessary to capture the attention of corporate executives and senior managers, but an effort must be made to explicitly connect business growth and profitability with BOP markets. As the case of Sumimoto Chemical illustrates, consistent corporate backing for BOP ventures can lead employees to identify innovative market based solutions. In Sumimoto Chemical's case, that solution came in the form of an insecticide infused mosquito net to protect vulnerable African populations against Malaria. The company's management philosophy, known as the "Sumimoto Spirit," aims to "generate profit not only for the company but also for society," and has helped motivate their employees to reach the BoP. Similarly, the multinational cement producer CEMEX chose to put an interdisciplinary team of its own employees on the ground in Mexico to better understand the social and home-building practices of low-income communities, and used that knowledge to develop a successful product line of housing just for the poor. Unilever's commitment to improving the lives and livelihoods of the poor in India is driven by the recognition that "the health of business is inextricably linked with the health of society."

It is also important to understand the complementarities between philanthropy, corporate social responsibility (CSR), and service to the poor, as these approaches cannot be easily separated. Some CSR initiatives have recently been criticized as mere token philanthropic attempts to address the needs of the poor. But if companies allowed themselves to engage only in activities where business goals and poverty alleviation were perfectly aligned, there would likely be fewer activities at the BoP. CSR activities have the advantage of providing a forum for businesses to learn about the needs of the poor.

ZMQ, a small to medium sized Indian software company, has combined its philanthropic commitment (12 percent of its profits) with its core competencies in developing ICT learning tools for social development in order to sponsor and create products and tools to bridge the digital divide. In one such venture, the company funded the development of a technology package to build the capacity of grass-roots women in using livelihood-generating technologies. The Global Alliance for Improved Nutrition (GAIN) has formed a Business Alliance to explore the space between philanthropy and strategic private sector interest by developing new business models to fortify food with necessary vitamins and minerals and making it available and affordable to the poor. Large companies, such as Abbott Laboratories, often utilize their corporate foundations to explore the complementarities between philanthropy and CSR. Abbott Fund, in partnership with the Government of Tanzania, is engaged in a major project that is modernizing the country's health system. By improving hospitals' physical infrastructure, training programs and working conditions, and utilizing the latest IT, the partners are expanding access to quality HIV/AIDS testing and health care for the poor.

3.7 Problems: What are the problems arising, and how did them solve these issues, examples

In developing countries, companies often need to deal with weak institutions or a lack of formal market mechanisms. In Unilever's business expansion in India, the company had to work around many infrastructure and institutional challenges, such as poor transport links and high rates of illiteracy.

In this context, it is crucial for business to address certain questions:

Why do the poor pay more for the same or similar goods and services than the rich?

How can level playing fields that provide equal opportunities for the poor be created?

To what extent do "organized or well-developed markets" capture the costs and benefits of the poor?

What access do the poor have to these markets?

These are important questions, because although informal markets can facilitate commerce, they can also engender abuse, create huge income inequality and exploitation, and become a barrier to entry and growth. Examples in this issue of Development Outreach illustrate how companies like Nestlé, CEMEX, Unilever, and Sumimoto have overcome the barriers of the informal economy and the lack of institutional and physical infrastructure, and ultimately helped the poor integrate into the official economy. Unilever developed a new business model to engage local entrepreneurs to set up direct-to-consumer retail operations, with training from the company and support from self-help groups or microfinance banks. In 2007, Project Shakti estimated that 46,000 entrepreneurs (mainly female) had reached more than three million rural Indian households.

To meet the needs of 4 billion people is a daunting challenge that can only be met by taking successful models to scale. We need to look not only within existing markets, but also among countries and continents, to find solutions that 'travel well', particularly between developing countries. Companies can play an important role in transporting best practices across borders, as the ZMQ and DEFTA Partners examples illustrate for countries in Asia and from Asia to Africa.

4. CONCLUSION

Effective poverty alleviation requires collective action by MNCs, local companies, governments, IFIs, and NGOs. Building successful partnerships is highly complex and requires clarification of roles, responsibilities, and incentive structures. Who is in a position to change the rules of engagement with the poor? How can corporate gaming be prevented to avoid increasing poverty and environmental degradation, particularly when institutions are weak? Where does the value-creating potential lie within various stakeholder groups? How do we best organize initiatives and provide incentives to collaborate in developing more comprehensive and innovative models of engagement? And what are the most innovative ways of complementing the efforts of government, multilateral development banks, and development agencies?

To be sustainable, business initiatives need to be owned and informed by the developing country stakeholders themselves. The issues are global but most of the solutions are local. New mindsets and open dialogue with local entrepreneurs are prerequisites for collective action. The DEFTA Partners example clearly illustrates that partnership between entrepreneurs from both developed and emerging economies can play a critical role in creating innovative development solutions. DEFTA Partners, in collaboration with BRAC, a local development organization based in Bangladesh, are investing in improving the country's communication infrastructure, thus providing access to millions of poor people.

I hope that the examples presented in this issue will be used to help local beneficiaries define the challenges, set their own agendas, and successfully implement the best possible solutions.


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