Businesses, growth and the good society

Stuart L Hart is the S C Johnson Chair of Sustainable Global Enterprise and Professor of Management at Cornell University's Johnson School of Management. In his new book, Capitalism at the Crossroads: The Unlimited Business Opportunities in Solving the World's Most Difficult Problems, Hart argues that companies can become the catalyst for a truly sustainable form of global development-and profit in the process. The book was published by Wharton School Publishing in March 2005.

Professor Hart's research interests center on strategy innovation and change. He is particularly interested in the implications of environmentalism and sustainable development for corporate and competitive strategy. With C K Prahalad, Hart wrote the pathbreaking 2002 article "The Fortune at the Bottom of the Pyramid," which provided the first articulation of how business could profitably serve the needs of the four billion poor in the developing world. Earlier, he wrote the seminal article "Beyond Greening: Strategies for a Sustainable World," which won the McKinsey Award for Best Article in Harvard Business Review in 1997, and helped launch the movement for corporate sustainability. He has published over 50 papers and authored or edited five books. His work has appeared in a number of leading scholarly journals.
(Pic: Dede Hatch)

In addition to the 1997 McKinsey Award, his 2001 paper "Do Corporate Global Environmental Standards Create or Destroy Market Value? (with G Dowell and B Yeung) won the Moskowitz Prize for outstanding research in the field of socially responsible investing. He was also recognized as a "Faculty Pioneer" by the World Resources Institute in 1999 for his work in integrating environmental and social issues into the management education curriculum. Hart received a Master's degree from Yale University's School of Forestry and Environmental Studies (Environmental Management), and a PhD from the University of Michigan (Planning and Strategy).

Subramaniam Vincent caught up with Stuart Hart at Cornell University in September-October 2005.

In your book Capitalism at the crossroads, you're standing the very premise of business and industralisation led growth on its head. You're saying that the conventional approach of economic growth and development will not alleviate poverty. Why?

The current model of industrialization led growth cannot reach everyone in the world. It is also plundering the planet. It is by nature not amenable to including the large majority of poor people and it is destined to keep then at the bottom of the pyramid. This model is also intensive in capital use and demands little labour, whereas there are massive amounts of labour available.

This model is also the reason for population growth from 2 billion in the 50s to 6 billion now. It is a model of development that has been disruptive to the way of life of millions of local and rural communities throughout the world and has broken communities’ own practices and traditions of keeping population in check.

But Indian policy makers will belabour for hours that such economic growth is needed to alleviate poverty. How can the mainstream elite in developing countries be asked to not pit poverty alleviation against the environment without getting into a complex technical argument?

We have to look at where the point of leverage is. This is not with government institutions. The leverage for change is with the business community. It is possible to make a more compelling case that sustainable development is in the interests of business. But it will take a new form of commercial development on a massive scale that governments can facilitate.

I’m not too hopeful for change coming from policy makers themselves. Political scientists have shown how policy capture happens in government when incumbent commercial interests stack the deck to create an iron triangle – elected officials, government staff and industries. This much is known. In saying this I acknowledge that there are good officials in governments too. They are fighting frustrating battles to make change, in India and elsewhere.

But if the institutions of capitalism can change and give momentum to sustainable business, change can come quickly. In the United States for example, the CEO of GE has gone on record to accept that environmental sustainability is key and on the contrary (everyone knows) that it is the Bush-Cheney energy policy which is loaded in favour of the incumbent interests.

Why do you think the quest for global environmental sustainability must happen in products and services for the poor 4 billion of the world, and not in products and services for the better off 2 billion? Isn't the consumption of the better off more or less the link to environmental unsustainability? There is the risk of the same top-down prescription here as well, just as the first one on industralisation and production led growth alone, failed.

The reasons are practicality and again, leverage for change. I ask myself where’s the mostly likely point of change?

One, I’m convinced that the frontal assault approach (to use a military metaphor here) has failed. The frontal assault to poverty alleviation and environmental sustainability has gone as follows:

To address the problem of the environmental cost of over-consumption and waste by the rich, environmental groups as well as governments in developed nations have taken an end-of-the pipe approach, through regulations for companies and moral arguments (“don’t drive an SUV”) to consumers. We’ve seen how effective that is. It has not worked. Consumption continues. This assault has gone past most Americans.

To address the problem of poverty, the ‘aid’ regime has gotten setup. And we know where the billions of dollars of aid to poor countries have gone. It has not worked. In military terms again, aid itself a well defended hill. There are entire constituencies that depend on people being poor to have aid continue flowing out.

Two, I ask myself what dynamic could be put in motion in this scenario to make change? If frontal assault failed, Judo – where you use the weight of the opponent to throw the opponent, may work better. At the base of the pyramid (BOP - 4 billion poor of the planet) there are no incumbent and well defended business interests. There are people with needs for goods and access to services. As a capitalist, if you can figure out how to reach them, you are not swimming upstream (by developing products for the rich and being unable to sell them to the poor), but with the flow.

Take the company ApproTEC. ApproTec is an NGO that creates technology for poor and low income rural people, but runs as a business. It developed a micro-irrigation pump for East Africa. The pump was produced locally and deployed in Kenya, Tanzania, etc. Subsistence farmers there have long been at the mercy of a short and erratic rainfall pattern. There is no irrigation infrastructure in many areas. This pump allows the farmers to use easily a local source of water to irrigate locally. It does not require hours of pumping as well. Within 15 minutes or so of use, farmers are able to pump enough water.

But one farmer took this system further; he used it creatively to grow his operation. He used the pump to hose up water to a mini water tower. He was then able to run a nursery business that employs 12-15 street kids. The nursery business itself was a success. The water that leaks out of the tower is not wasted. It falls into a fish pond. The waste from the fish ponds goes back to the agricultural operation. This farmer, who had an annual income of 180 USD or so per year, is now making close to 18000 dollars per year, which has brought his family into the middle class.

But ApproTEC’s technology development approach is premised on the idea that technology must not be given away freely. People don’t respect freebees, and it loses value. Further, for recipients it’s a matter of dignity when being asked to receive a handout. This is where the core premise of aid as means to poverty alleviation is flawed. It involves a lot of giving away, instead of enabling.

But even in ApproTEC’s case, there was government pressure that might have disrupted the program. A government I won’t name here wanted to buy a large quantity of pumps from ApproTEC because of the pump’s success, and give it away freely to farmers. The problem with this approach is that may drive a firm out of business. Further, such government programs will be wrapped up when the interest in this fades and that will leave farmers – the users -- in the lurch.

Alright. Moving on, in Capitalism, you acknowledge that MNCs are not the largest providers of employment, world over. Why then are you advocating your messages on economic development at the bottom of pyramid to the MNCs?

The question is how to catalyse change. I recognize that local communities and firms are the critical knowledge bearers. Any expectation that the MNCs can go off on their own and create economic opportunity for the poor is crazy. The only way is by partnering with local firms and NGOs.

Why must MNCs be involved? Because MNCs bring in capital. If they get involved, a significant amount of FDI will flow to the bottom of the pyramid, as opposed to the way it is happening now. Now most FDI linked economic activity is going to develop products and services for the wealthy in the developing countries. MNCs can change that direction, because they control it.

Two, MNCs bring enormous technological capabilities. If focused properly and focused on real problems of the poor, instead of working on solutions of the problems of the rich, they may develop meaningful products and services the poor can afford too.

Three is clout. There may be many well intentioned and capable local entrepreneurs who try to get off the ground with their own plan, but they get crushed because they are not able to overcome local political hurdles as well as corruption. MNCs, because of their size, can bring players to the table and shape the system.

But it’s precisely clout that MNCs have abused over the years. NGOs in general are very suspicious of big corporations. India has a history of the excesses of big corporations trying to line up their pockets.

This is true. And the suspicion is well placed. It is based on the track record of many MNCs. But since they have thrown around their weight for the wrong reasons, it is time they throw their weight around for the right reasons. They must flip over and use their clout to help advance the cause of society – environmental sustainability and eradication of poverty. MNCs can no longer take a back seat.

Also, trusting relationships between MNCs and NGOs may take time to be built. A significant amount of time and effort is required at the front end to develop and sustain partnerships.

But developing countries are not in a situation where conventional/pure equity or bank loan driven financing will take care of their investment needs. There is currently a lack of financing vehicles for ventures to develop products and services that are both sustainable and priced so that the poor can afford them. Many of these ventures may sometimes take over 6 years to cash out, which dissuades most venture capitalists, who are used a time horizon of 6 years for their investments.

What are local small businesses and firms in India already not doing well to create jobs and provide economic opportunity to the poor? Why does it even require intervention from big global firms to meet market needs?

Sure. But the question is one of time. Look at it this way. There are two trains running in parallel. One train is the big locomotive, and it is fast. But it is not sustainable. The other train is smaller. It is the alternative, sustainable train. But it is slower. Millions of people are awaiting the smaller train because the big one will miss them. If we get the bigger train to run on the same track as the alternative it may be able reach people faster and therefore sooner.

Also, the small and medium enterprises in India (and also the larger ones) are not all operating in a way that is environmentally sustainable. (I’m not referring to the handicrafts or eco-goods sector, but the industrial firms.) They also produce a lot of waste and pollution (like in the West). Scale that up and it’s not a pretty sight. If the SMEs in India were doing it right, we may not be here addressing these questions in the first place.

And it isn’t that everything that small businesses are doing now is wrong. But the simple fact is that there are hundreds of millions of poor who have not benefited from capitalism in India. That’s why they even threw out the previous government in 2004.

Like I noted earlier, big companies have the opportunity now of bringing technology and capital and refocusing it to meet the needs of the poor. They have the ability to think about how to bring in leapfrogging as well the capacity and investment (FDI) to do it.

Once large corporations have figured out how to scale up their operations internally, could it not result in the loss of the jobs as they consolidate their learning in better processes, because they may not need the local entrepreneurs and their employees anymore?

First, the new strategies must also not be viewed as an extended handout to the poor. We have to come back to the premise here that nothing is forever. It is simply not possible to put in place a capitalism strategy for economic development that will last forever. By definition if the approach is successful, if enterprises become profitable and generate income, sometime down the line, the rules of the game will change again.

Look at the United States today. What is the reason for the pushback against globalization --- outsourcing? Let’s say in the next 20 years or so, Indian firms have incredible success in both jobs and sustainability. To maintain that, then, will be a new challenge for India, just like the challenge the United States is facing today. The United States has a lot of people today who are undereducated and who are not able to become competitive in the economy.

Ultimately, you are saying that capitalism must turn over a new leaf and go to the poor. But staunch critics of MNCs will argue that capitalism always second sheeted labour, and it’s impossible that capitalism and labour intensive businesses will ever go together. What do you say to them? In fact, skeptics -- both on the right and the left – may say that your faith in corporations is misplaced. At the very least, they might say you are an optimist to think of these possibilities.

I have no faith in the corporations themselves. It's foolhardy to place faith in corporations. But I think there is an opportunity for the firms to engage in the strategies I have talked about to position themselves competitively for the future. It doesn't mean all corporations will refocus their energies towards the world’s poor. There will be those who reject this approach. My view is that those who reject this will lose out to the competition, because of the way markets will operate down the road.

Explain that a little bit more…

On the one hand there are all those people at the base of the pyramid. And that is where the growth is. If you are a large company and you look at that space, it’s very clear where you have to be going. I recognize that there will always be niche firms who market goods and services to rich customers. But the current crop of large MNCs must find future growth and if they don’t they will be outcompeted by the firms in the developing countries themselves. We are already beginning to see that happening.

But do I have faith that those corporations that focus on people at the base of the pyramid will driven by environmental sustainability strategies? No. A lot of them won’t. But they won’t win, because the new problems they create (environmental and perhaps social) will cause a backlash and will make it difficult for them to succeed. On the other hand, because of the sheer numbers of people who are poor, any option other than sustainable enterprises will be sheer folly.

There will be some hit-and-run MNCs. But who will emerge? Those who are able leapfrog with technology into sustainability.

The reason for this is that there are already a set of current driving forces that will become the new rules of the game. But even though these signals for (sustainability and poverty eradication) are strong, it takes time for behaviour itself to change, and for the results of such change to become obvious.

One driving force is ecological. Around the world, raw materials and the ecosystems they are connected to are under decline or threatened. Human impact on climate and biodiversity is well known. All natural systems are now under stress. This is pretty clear. The UN Millennium Ecosystem Assessment is already a global consensus on this.

I realize there are many who will say, here we go again – people have been talking about these scenarios for a while; there are other indicators to show that the situation is not so bad. And there are reasons for skepticism. When the global think tank Club of Rome brought out its Limits to Growth study in the early 70s, where they were wrong was in their projections about running out of raw materials itself. What they didn’t realise was that economics would take care of scarcity. When materials become scarce, they become expensive, and alternatives start popping up in the markets. We’re already seeing that with oil. Where they were right was in their projection on the stress that the underlying ecosystems would come under because of the growth model we have been following. Still, the most current, global and scientific consensus on the environment is the MEAS.

Likewise, there is also a new consensus on the problem of poverty. 50 years ago, there weren’t so many poor people, nor were there so many shanty towns. But our development model has created this mass of people at base of the pyramid, and the base threatens to get wider. The socio-economic drivers that create poverty are irrefutable. The UN Millennium Development Goals are a consensus on this.

But unfortunately there is a problem there. Even within the UN, the debate itself has become over whether these goals will be met. My view is that the MDGs themselves are not ambitiously set. Ashok Khosla of the Delhi based Development Alternatives put it very well. He asks to look carefully at the wording on the UN MDGs with regard to access to water and sanitation by 2015. The UN goal is to halve the proportion of people without such access. But by 2015 the world’s population is going to have grown even higher than it is today. That raises questions about what this goal’s achievement will mean in real terms.

Likewise the MDGs may set their targets to cover betterment of a 100 million slum dwellers, but they are merely scratching the surface. There may be as many as 2 billion people in shanty towns by 2015.

There are implications of all this for the corporate sector.

Some Indians reading this will argue that if the public goods that the West’s citizens enjoy more of -– public education and public health –- were available in developing nations like India, by and large, the millions of poor, even indigenous poor, will have been mainstreamed and become capable labour for being tapped by capitalism. It is the failure of this, i.e. governments, they will say has led to poverty. What do you say to them?

I agree that public goods are the government’s problem. They are the responsibility of the public sector. In point of fact, this does not apply to poorer countries alone. Governments have not done a good job of provisioning public services. The most common explanation for this is corruption. Corruption does not explain everything in failing public goods, but it is a significant part of the explanation for governments’ failures in developing countries. There are other explanations – inertia, bureaucracy, and inefficiency. But the failures of governments are not restricted to poor countries alone, this applies to developed countries too.

Even in the US, a ‘rich’ country, public goods are failing. We are providing public health in a way that one would not expect the United States to. We are in fact going backwards in public education and public health. So this is a situation which both rich and poor countries find themselves in. Governance has reached a level of complexity that it has become exceedingly difficult for governments to exclusively do the job they have been entrusted with. Bringing the for-profit sense into government may help, but by that I don’t mean going the ‘privatization’ way, or slashing government programs and benefits. I am saying that paradoxically, the private sector may actually be able to help the government in provisioning of public goods, because governments are not in a position to do so.

But the private sector responds to market forces. Historically, markets forces and public goods have been seen to be opposite to each other.

I don't want to sound like a complete rebel here, but I think the whole theory of public goods and externalities (that market based operations create, like pollution) are accepted as gospel. The theory of markets and the theory of externalities are created by economists. They were devised during the industrial revolution over century ago or more. The industrial revolution is notorious for its ‘take and make waste’ philosophy where you take raw materials, bludgeon them into submission, produce goods, and generate externalities like waste and pollution.

But as we move into the clean tech and beyond-greening era, it has become clear that private firms can develop products and services without producing the externalities and in fact they may able to introduce restorative services, and in turn contribute to producing public goods. They can develop partnerships with civil society organizations and become a catalyst to alleviation of poverty alongside moving to environmental sustainability, which otherwise might not happen.

I don’t want to be harsh here, but it’s time for the tyranny of the economists to end. Economists have owned this is space – of measuring economic development – for over 50 years. But everyone agrees there is more to life than money. The proper measure of development is not income.

In order to come up with a different set of metrics to measure development going forward, we need to go beyond economists. We need to bring in psychologists, cultural anthropologists and whole host of other such people. Human beings are complicated animals with a range of feelings and senses. How can we measure happiness and contentment from GDP? And pride and joy? But isn't the goal of 'development' all of these things? So then for such development to happen, shouldn't that be what's measured?

I’m not asking for a return to the caves, but for example, it is well documented that indigenous societies have existed where people have lived well and had a life rich with symbolism and culture. They have been happy. And yet economists call them poor people. Their GDP is zero.

But are there standardisation moves to measure economic activity differently and without that do you see any hope?

There are ongoing discussions that we must go past GDP. There are proposals to correct the GDP with other indicators too. But like the development of businesses in the direction of environmental sustainability too, these indicators are emergent. There are no universally agreed upon metrics. My sense is that businesses must first go in the new direction I’ve argued for and along the way better measures of development can also be figured out.

But I’ll also say that the idea that governments could pull out better measures of development from intellectual experts sitting in a room and use that to impose policy on society is unlikely to work. A distributed bottom up approach by businesses themselves is more likely to help.

Several times in Capitalism, you say that businesses and executives must demonstrate empathy and listen to local and indigenous communities and the poor, by and large. At a higher level you're also asking for a complete values shift in business itself. How did you come to that conclusion?

I’ve witnessed the arrogant attitude of people in the business world. Many think they know the answers. But they lose the confidence of the poor when they engage with them on those terms. Poor people don’t like being rammed with solutions and handouts.

Empathy is a basic requirement. The starting point for firms wanting to develop products and services for the poor is to acknowledge not knowing the questions, but to discover the questions. But typically, firms have looked at base of the pyramid markets like they are a lot of nails. They then pull out their hammers. Firms need to put down the hammer (existing high cost technologies and processes) and listen.

In one instance in Kenya, a firm sent its executives and some MBA students to understand market needs of people in a locality. They went into a woman’s house with cameras and lights to capture what people had to say. She told them what they wanted to hear. After a few hours later they left. Contrast this with a different firm’s approach. The team from this firm spent 10 weeks in a low-income ghetto styled locality and got to know the people better, as they were. They found out that people liked their dwelling. There was lesser petty crime of the big-city kind there, even though law enforcement for organized crime was pretty weak. It takes being humble to understand.