Foreign aid is being cut, but business will keep fighting poverty | William Warshauer
It’s easy to feel discouraged these days about international development. The new US administration has proposed cutting the foreign aid budget by nearly a third and eliminating certain programmes. Even if the US Congress manages to salvage some of these funds, the fight against global poverty seems at risk of losing momentum.
But it’s worth remembering that there is another force out there that I believe will maintain, and even increase, progress against poverty: business.
In the past 10 years, private sector investment to developing countries has been growing faster than foreign aid. Indeed, developing countries now receive 27% more foreign business investment than development aid – a trend likely to grow over time. Even the lowest-income countries, as classified by the World Bank, have seen business capital flow into their economies at dizzying rates, with investment increasing nearly nine-fold since 2000.
It’s tricky to attribute causation. But it’s worth noting that the poverty rate in these countries has fallen by nearly a third in the same time period. A 2010 study looking at sub-Saharan African countries bears out this idea, finding a “positive and strongly significant relationship between FDI-net inflows and poverty reduction”.
Global business has now reached a tipping point that will accelerate these gains. For one, the middle class – and overall populations – of poor countries are growing faster than in industrialised nations. This means an irresistible new customer base for corporations, one that is already spurring them to hire, source and invest more in these regions.
If your company operates irresponsibly today, prepare to wake up to a social media firestorm tomorrow
Second, the internet era now subjects businesses to unprecedented scrutiny from consumers, NGOs and the media. If your company operates irresponsibly today, prepare to wake up to a social media firestorm tomorrow (and to improve your business practices the day after).
Conversely, firms can reap rewards from the growing number of customers who want to know the story of how their products are sourced, and value companies that “do the right thing”. One global study of online consumers across 60 countries found that 55% would pay more for products and services from businesses that have a positive social and environmental impact.
Increasingly, however, the private sector is fighting poverty abroad simply as a regular part of doing business. Corporations like Cargill, Unilever, Walmart and Nestle – not the first names one might associate with helping the poor – are nevertheless training and buying from millions of small farmers and entrepreneurs worldwide in an effort to strengthen supply chains and reduce costs through local sourcing. Working with a cash base larger than many countries’ GDPs, they can achieve the kind of scale and impact that can dwarf many development programmes.
Coca-Cola, for instance, once imported fruit puree from abroad for the Minute Maid juice it sold in east Africa. Now, after training 54,000 local farmers to improve the quality and quantity of their crops, Coca-Cola produces juice made from these farmers’ fruit, and has started a multibillion-dollar Source Africa initiative to strengthen its supply chains there. The farmers from the initial training – a third of them women – created their own business groups and increased their incomes by an average of 142%.
Of course, business can also have a negative impact on poor communities, and some of these same multinational companies have rightly faced criticism for unethical actions abroad. Short-term business interests can sometimes lead to unjustifiable practices such as squeezing local suppliers to sell below cost or following environmentally unsustainable practices that destroy future value.
But for the majority of businesses, sustainability has moved from a buzzword to a watchword, a necessary means to succeed in competitive markets. More than 9,000 companies in 170 countries have signed the UN’s Global Compact, which requires signatories to adhere to responsible business practices and contribute to the sustainable development goals. Many large companies have developed their own public sustainability pledges, committing them to specific targets of improving incomes for people in the developing countries where they operate.
Consider that the combined annual procurement budgets of some of these companies is larger than the entire US foreign aid budget, and you start to get a sense of the potential impact.
These positive trends don’t just apply to big business. The environment is steadily improving for small and medium enterprises, which provide more than half of the world’s formal jobs and play a critical role in reducing poverty.
In 2005, for instance, only 41 countries gave permits to start a business within 20 days. Today, 130 do, according to figures from the World Bank [pdf]. In sub-Saharan Africa, the number of countries that have made at least one business regulatory reform has more than doubled in the past decade. And the trend is growing. Just this past year, 20% more countries implemented business regulatory reforms than in the year before.
I feel the greatest optimism, however, when talking to some of the entrepreneurs behind these numbers. People like the group of women in northern Peru, who overcame gender barriers and drug violence to form a successful, award-winning chocolate business. Or the farmers in Ethiopia who worked so hard to improve the quality of their coffee that they are now selling it to numerous specialty roasters, and have built a school, houses and infrastructure in their community with the extra income.
Yes, foreign assistance can do much to help these people and many will suffer if the US reduces its aid budget. But business will keep reducing poverty regardless – driven not only by growing markets but also by the limitless determination of millions of entrepreneurs in the developing world.
William Warshauer is president and CEO of TechnoServe. Follow @TechnoServe on Twitter.
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