Does international business investment help or hinder the fight against poverty?
Thursday, December 8, 2005
Financial Times, 8 December 2005 – It takes a good deal of courage, some would say foolhardiness, for a multinational company operating in impoverished parts of the world to open its internal documents to scrutiny by campaigners for fairerglobalisation.
But that is what Unilever has done in a groundbreaking project with Oxfam that sets out to explore the fraught question: does international business investment help or hinder the fight against poverty?
For nearly two years, the consumer goods company has allowed Oxfam to probe and analyse its socio-economic impact in one very large country, Indonesia, where it sells soap, soy sauce, ice cream and mosquito coils to consumers, more than half of whom live on less than Dollars 2 a day.
Unilever says it was motivated by the desire to play its part in global efforts to eradicate poverty. “We needed to increase understanding of the impact of the operations of a business like ours on the lives of poor ???people,” says Patrick Cescau, chief executive.
It was the first time the company had invited a non-government organisation to examine documents and interview local employees, and it was clearly a painful experience. The company has endured relentless challenge, explains Mr Cescau in a foreword to a frank report on the collaborative project.
“At times it has been hard for our managers to find their values and behaviours subjected to such sceptical scrutiny, and to see their achievements, when operating in a complex business context, so lightly passed over,” he says.
But Unilever was not alone in taking a gamble. Oxfam, which agreed not to disclose confidential information, says it has gone further than before in exploring the motivations of companies and the trade-offs they make. It has been forced to revise some assumptions about big business.
“We learnt that our analysis needs to be more alert to the differences between multinational companies,” Oxfam admits. Unilever Indonesia, which depends on local suppliers, employees, distributors and customers and takes a long-term approach, “is very different from some of the traditional targets of . . . campaigning, such as extractive or export-processing industries”.
During the country’s financial crisis of 1997 and 1998, for example, Unilever adapted and strengthened its business rather than withdrawing from Indonesia, as many other multinationals did, says the report. It expanded sales of products such as shampoo in smaller packets, switched to local suppliers in response to currency devaluation and acquired local companies affected by the crisis.
Oxfam says the research, which concentrated on Unilever’s operations in 2003/4, challenged its view that expansion by a multinational squeezed domestic companies. Although the findings were not conclusive, “it appears that during the period under review, competing domestic industries had expanded rather than contracted”.
The charity is open about the risk that its collaboration with Unilever will attract criticism from partner organisations and colleagues sceptical about the potential of multinationals to benefit poor people. But it says there are lessons for other NGOs in what it discovered about Unilever.
A surprising finding is that more people are employed, and more value is generated, in the distribution and sale of goods than in the supply chain. Unilever, which has been active in Indonesia since 1933, calculates that 90 per cent of poor consumers buy its products in the course of a year.
The jointly funded report, which is available on the Oxfam GB and Unilever websites, estimates that the company indirectly provides the equivalent of 300,000 full-time jobs, in addition to its 5,000 direct employees. More than half of this indirect employment is in distribution and retail, including up to 1.8m small shops, street hawkers, kiosks and warung, outlets that operate from family homes.
Pressure groups that focus their efforts on improving conditions in multinationals’ supply chains could usefully turn their attention to what happens on the distribution side, Oxfam says.
“We have gained a better understanding of the importance of considering the whole value chain, including the potential for distribution chains to generate employment and income,” says Barbara Stocking, director of Oxfam GB, who initiatedthe partnership with Niall FitzGerald, Mr Cescau’s predecessor.
Mandy Cormack, who was responsible for the research project at Unilever, says: “We were all just amazed at the scale of the value-added that is generated in the distribution chain, and the number of people who may not be full-time but are getting a first taste of what the formal economy is like.”
The researchers calculate the total value generated by Unilever’s operations at Dollars 633m (Pounds 364m), of which Unilever earns about Dollars 212m before tax. The rest is distributed among other participants, including taxes to the government. Distributors and retailers gain about 50 per cent more of the totalvalue than producers and suppliers.
Among the poorest and least powerful people in Unilever’s “value chain” are small farmers who grow crops such as coconut, sugar and black soybeans. Helping them out of poverty is not straightforward, as demonstrated by Unilever’s experiment in cutting out middlemen and buying black soybeans direct from a group of farmers.
Unilever worked with an Indonesian university and Rabobank, the Dutch bank, to improve seed quality, provide credit and guarantee purchases from the farmers at a contracted price. The novel strategy has attracted growing numbers of producers and given the company more consistent supplies for its fast-growing Kecap Bango soy sauce brand.
Even so, both sides acknowledge this may not be the ideal answer to the problems of poor farmers, since they risk becoming over-reliant on a single, powerful buyer. For Unilever, direct purchasing has given it an insight into the far reaches of its supply chain, but it is complicated and costly.
The partnership wisely does not pretend to have found definitive answers. Many questions remain unresolved, such as: what is a “fair price”? How much higher than the legally required minimum wage should multinational pay-rates be? Is marketing to poor consumers helpful or exploitative?
Oxfam expresses concern over Unilever’s extensive use of contract employees, who make up about 40 per cent of its core 5,000-strong workforce, saying they might not be subject to the high labour standards the company applies to its direct employees. But it notes that outsourcing and contract employment might be crucial to a company’s strategy, saying: “A challenge for Oxfam is how to acknowledge the trend but suggest feasible alternatives that avoid its often negativeconsequences.”
Both sides stress that poverty must be tackled from many angles. The research shows that participation in a multinational’s operations does not guarantee improvements for poor people, says Oxfam. “There need to be other social institutions and resources in place, such as credit and saving schemes, marketing associations, and insurance schemes, as well as diversification of income streams to avoid dependency on any single company or market.”
Despite their disagreements and tortuous negotiations, Unilever and Oxfam say they have found more common ground than they expected. It may be only a first step, but it is a grown-up approach to understanding how globalisation affects the people at the bottom.
Lessons learned from the partnership:
??? * It was essential to have Unilever’s input. “Any analysis that we could have done by ourselves would have been incomplete and superficial. Without this partnership we would have probably reached some wrong conclusions.”
??? * Difficult negotiations over language caused frustration.
??? * “But we came to realise that negotiating a common text forced us to understand each other in a way that would have been impossible if we had written separate documents.”
??? * Not enough time was devoted to the research, leaving many questions unanswered. More on-site interviews would have helped. Despite considerable disagreement, both sides are committed to contributing to poverty reduction.
??? * The project took far longer than expected because each point of disagreement had to be negotiated. When the two sides reached a common understanding, it was hard to communicate this “quickly and easily to other, more sceptical, non-team members”.
??? * Business concepts – such as “lost time accident” statistics and “total productive manufacturing” – can be impenetrable to outsiders. They had to be explained to show why managers were confident about their performance data.
??? * Keeping in contact during the analysis and writing stages was critical to developing trust. This trust “enabled us to probe deep-seated preconceptions on both sides and explore sometimes painful perceptions of the reality of business operations”.