Sustainable Economy and Emerging Markets [1 ed.] 0429437307, 9780429437304

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A valuable study of sustainable development in emerging markets. It offers original insights and in-depth research with lessons for policymakers and scholars alike. — Professor Clinton Fernandes, UNSW Canberra, Australia This book will be useful to students of International Business and Management courses who wish to explore contemporary content around emerging markets and their business opportunities. — Professor Basil Janavaras, Minnesota State University, USA

SUSTAINABLE ECONOMY AND EMERGING MARKETS

Sustainable Economy and Emerging Markets provides a snapshot of the different dimensions of sustainability and analyses how they interact and configure themselves, case by case, in selected emerging economies. The parameters of economic growth in developing economies are explored in the context of systems, climate change, and environmental challenges. With contributions from a range of business academics, economists, and practitioners, this book conveys a picture of the complex nature of the new global business environment, especially the geopolitical dynamics of emerging countries, and breaks down the challenges across geographic fault lines, offering insights into current business practice. By adopting an in-depth case study approach, this edited book offers and discusses examples from several emerging markets and elucidates how these organisations have modelled business based on sustainable development in its various forms. This book will prove valuable reading for students and scholars of international business, international trade, sustainability, and development. Stefania Paladini is Reader in Economics and Global Security at Birmingham City University. She has worked in East Asia as a Trade Commissioner and she has published extensively on Asian countries, non-traditional security issues, and the space sector. Suresh George is Associate Professor and Subject Lead for International Business and emerging markets at Coventry University. His research work primarily revolves around Strategic Management research, practical global strategy involving global firms and consultancy projects, and International Business Pedagogy. He tweets as @sureshgeorge and curates the GLOBESTRATEGY social space.

SUSTAINABLE ECONOMY AND EMERGING MARKETS Edited by Stefania Paladini and Suresh George

First published 2020 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2020 selection and editorial matter, Stefania Paladini and Suresh George; individual chapters, the contributors The right of Stefania Paladini and Suresh George to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Paladini, Stefania, editor. | George, Suresh, editor. Title: Sustainable economy and emerging markets / Stefania Paladini, Suresh George. Description: New York : Routledge, 2019. | Includes bibliographical references and index. | Identifiers: LCCN 2019025290 | ISBN 9781138346413 (hardback) | ISBN 9780429437304 (paperback) | ISBN 9780429325144 (ebook) Subjects: LCSH: Sustainable development–Developing countries. | Developing countries–Foreign economic relations. | Developing countries–Economic policy. Classification: LCC HC59.72.E5 S8837 2019 | DDC 338.9/27091724–dc23 LC record available at https://lccn.loc.gov/2019025290 ISBN: 978-1-138-34641-3 (hbk) ISBN: 978-0-429-43730-4 (pbk) ISBN: 978-0-429-32514-4 (ebk) Typeset in Bembo by Swales & Willis, Exeter, Devon, UK

CONTENTS

List of contributors Introduction: sustainable economy and emerging markets Stefania Paladini and Suresh George PART I

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1 Dimensions of sustainability in impoverished contexts in emerging economies Stefanie Beninger and Matthew Wilson

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2 Public–private partnership as a mechanism to encourage MNEs’ contributions to sustainable development goals: insights from Brazilian experience Leonardo Elizeire Bremermann, Roman Teplov, Sina Mortazavi, Juha Väätänen, and Suraksha Gupta

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3 MNEs’ sustainability challenges and corporate social responsibility in emerging markets: the case of Amway Won-Yong Oh, Rami Jung, Young Kyun Chang, and Yeojin Kim

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4 The Belt and Road Initiative: infrastructure and sustainable development Neil Renwick

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PART II

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5 A tale of two debt crises: the IMF and the unsustainable development of Ghana James Silverwood and Jeremy F. Moulton

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6 Political economy of small-to-medium enterprise (SME) finance: lessons from Root Capital Mine Aysen Doyran

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7 Perspectives on governance and development of sustainable economy: institutional policies, challenges, and scenarios in Kenya Andrew Amayo 8 Democracy, sustainability, and economic growth: the case of Bangladesh’s garment industry Krish Saha and Stefania Paladini PART III

9 Work time and environmental impact in a global perspective Alexandra Arntsen and Bruce Philp 10 Green innovation in South Asia’s clothing industry: issues and challenges Amira Khattak

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11 Designing business models to overcome the barriers to renewable energy market creation in developing and emerging countries: Masar box, a case study 184 Valtteri Kaartemo 12 Innovative business models towards sustainability: specificities and challenges on the Russian market Anna Veselova, Yulia Aray, Anna Levchenko, and Dmitri Knatko

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13 E-waste and sustainability in a changing environment: a Behavioural Economics approach Xavier Pierron

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Conclusions: many paths to sustainability, an underlying philosophy Stefania Paladini and Suresh George Index

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CONTRIBUTORS

Andrew Amayo is Senior Lecturer in International Management and an experi-

enced board member and consultant. He has worked extensively on the development of existing pedagogy, award winning global/industry partnerships, world-class insights, and innovative learning solutions. Andrew also has extensive consultancy experience helping businesses to create market winning entry strategies using several experiential learning tools. His consultancy experience has been specifically designed around helping SMEs in East Africa and the wider EMEIA countries to penetrate the global market. He has also designed specific interventions and solutions in Global Logistics, Business and Professional Skills Coaching, and impactful third sector development projects. Yulia Aray is Senior Lecturer at the Strategic and International Management

Department, Graduate School of Management, St Petersburg State University, Russia. She is also a researcher at the PwC Centre for Corporate Social Responsibility. Her main research interests are connected with social entrepreneurship, sustainability, sustainable mindset, and corporate social responsibility. She is implementing related learning courses at the Graduate School of Management, St Petersburg State University, and has more than 25 publications in Russian and English. Yulia is a member of the Academy of Management (AOM), Strategic Management Society (SMS), EMES Network, and LEAP! (PRME Working Group). Alexandra Arntsen is Lecturer in Economics at Nottingham Trent University.

She is completing her PhD “Environmental and Societal Attitudes to Working Hours in Feminist Perspective: Patterns, Preferences and Policy”. The thesis is considering individual and organisational environmental behaviours in relation to working time and attitudes and preferences to the concept of work-time

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reduction as an environmental tool. Her areas of research are working hours, work-time reduction, environmental economics, feminist economics, and heterodox economics. Stefanie Beninger is Assistant Professor of Marketing at IE Business School, IE

University, in Madrid, Spain. She holds a PhD from Simon Fraser University in Canada and an MBA from Nyenrode Business University in the Netherlands. Her research, focused at the nexus of marketing and society, has been published in leading journals and as practical case studies, and presented at international conferences. She is an upcoming Marie Curie Fellow, a prestigious fellowship from the European Commission, and she previously earned the Joseph-Armand Bombardier Doctoral Award from the Social Sciences and Humanities Research Council of Canada. Prior to joining academia, she worked professionally in marketing and sustainability. Leonardo Elizeire Bremermann received BSc and MSc degrees from the Catholic University of Rio Grande do Sul (PUCRS), Porto Alegre, Brazil, in 2005 and 2008, respectively, both in Power Systems (Electrical Engineering) and a PhD from the MIT-Portugal Program of the Faculty of Engineering of the University of Porto (FEUP) in Porto, Portugal, in the Sustainable Energy Systems Program. Since April 2015 he has been Professor of Energy Engineering at the Federal University of Santa Catarina, in Araranguá Centre, and was head of the Energy and Sustainability Department of the same Center until July 2018. His research activities are in the areas of planning and operation of electric power systems and renewable energy sources in the Laboratory of Planning in Electric Power Systems (LabPlan). He is a member of the Research Group Technological Nucleus of Electrical Energy (NTEEL) and collaborates with the Institute of Systems and Computer Engineering, Research and Development of Brazil (INESC P&D Brasil). Young Kyun Chang is currently Associate Professor of Management and serves as managing director of the Sustainable Business Ethics Research Institute (SBERI) at Sogang University in Korea. His research interests include business ethics and corporate social responsibility. His published works have appeared in journals, including Journal of Applied Psychology, Journal of Management, Journal of Business Ethics, and others. Mine Aysen Doyran is currently Associate Professor in the Department of Economics and Business at Lehman College of the City University of New York (CUNY). She teaches Strategic Management, International Business Management, Business Statistics, Managerial Economics and Principles of Management courses. Her research examines financial management of firms with a special interest in business crisis management, corporate governance in the aftermath of

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financial crisis (USA) and business policy and strategy in developing as well as emerging market economies. Suraksha Gupta is Professor of Marketing and Director of Research at Newcas-

tle University London. She holds a PhD from Brunel University in the UK, an MBA from the Institute of Management Technology in India, and a Bachelor of Commerce from the University of Delhi, India. Research publications of Suraksha Gupta have appeared in highly reputed journals such as Journal of World Business, British Journal of Management, Journal of Business Research, Industrial Marketing Management, European Journal of Marketing, Technological Forecasting and Social Change, Information, Technology and People, Behaviour and Information Technology, Computers in Human Behaviour, Studies in Higher Education, Thunderbird International Business Review, Qualitative Market Research: An International Journal, and International Studies in Management Education. Rami Jung is a doctoral student at Sogang University in Korea. Her research interests include corporate social responsibility and strategic decisions of Multinational Corporations (MNC). She has published several papers in Journal of Business Research, Korean Journal of Business Ethics, and others. Valtteri Kaartemo DSc is Post-doctoral Researcher at Turku School of Eco-

nomics, University of Turku, Finland. He recently received 3-year research funding from the Academy of Finland to increase the understanding of the roles of technology in the reformation of markets. Earlier he acted as the Head of Research of Masar B.V., a Dutch smart energy startup that provided solar energy solutions in Africa. Kaartemo is co-author of several books, book chapters, and peer-reviewed articles. His research interests include market shaping, service research, technology, network dynamics, international entrepreneurship, and various processes within and linking these phenomena. His research has been published, for instance, in Industrial Marketing Management (on research trajectories of Service-Dominant Logic (2017) and network microfoundations (2019)) and Journal of Service Management (on customer participation management (2016) and the dark side of market shaping (2018)). Amira Khattak is Assistant Professor of Marketing and Associate Director MBA

Program in the College of Business Administration, Prince Sultan University, Saudi Arabia. She has received her PhD degree from the University of Auckland, New Zealand. Her areas of interest and research are environmental and social upgrading in global value chains (GVCs). Amira is a member of advisory and editorial boards of various local and international journals. Amira has published in reputed journals including Competition and Change: The Journal of Globalisation, Financialisation and Political Economy, British Food Journal, and Critical Perspectives on International Business.

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Yeojin Kim is a doctoral student at the University of North Carolina at Chapel Hill. Her research interests are entrepreneurship and innovation. Dmitri Knatko is Senior Lecturer at the Strategic and International Management Department, Graduate School of Management, St. Petersburg State University, Russia. His main research interests are related to the fields of strategy, sustainability, and sustainable value chains. He is a member of GEM (Global Entrepreneurship Monitor) team in Russia. He is also active in teaching related courses at the Graduate School of Management, St. Petersburg State University, as well as providing consultancy for businesses operating on the Russian market. Anna Levchenko has been carrying out teaching and research activities since

2013, working as Assistant Professor of the Operations Management Department of St Petersburg State University. Anna started her research career at St Petersburg State University in 2007 after her study at the Department of Economics of Research and Development at the Faculty of Economics of St Petersburg State University. Just after graduation, she continued as a PhD student at the Graduate School of Management of St Petersburg State University. In 2016 she defended her PhD thesis on innovation capabilities of organisations, methods of their assessment and management. Anna Levchenko is author of more than ten publications in Russian and English languages. Anna also carries out teaching activities in Supply Chain Management and Inbound Logistics and Warehouse Management. As a researcher she is a member of several international and Russian professional associations in the field of supply chain management. Sina Mortazavi MSc (Econ. & Bus. Adm) is a PhD candidate at LUT Univer-

sity in Lappeenranta, Finland. In his doctoral dissertation he focuses on social innovation approaches in regards to capability building in developing countries. Sina earned his Master’s degree in business administration with specialisation in international marketing from Linnaeus University in Sweden. Prior to his positions at LUT University, Sina was a research/teaching assistant in Linnaeus University where he was involved in several research projects. He has been carrying research on international business, supply chain management, and international marketing. Sina has teaching experience in several international business courses as well as method-based courses both in Sweden and Finland. Currently, his research interests evolve around inclusive innovation, emerging markets, the role of multinational enterprises, and social empowerment. Jeremy F. Moulton is Associate Lecturer at the University of York’s Department

of Politics. His research interests include policy and politics in the European Union, climate action, sustainable development, emerging markets, and urban and multi-level governance. His doctorate, for a thesis entitled “A Tale of Two Cities: Ecological Modernisation, Climate Action and Political Myth in the European Union”, was awarded in March 2018 at the University of Hull’s

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Department of Politics and International Studies. The chapter in this edited book is Jeremy’s second co-authored work with Dr James Silverwood. Won-Yong Oh is Lee Professor of Strategy at the Lee Business School, University of Nevada, Las Vegas in the USA. His research focus lies primarily in three areas: corporate governance, strategic leadership (CEO and top management team), and corporate social responsibility (CSR). Bruce Philp is presently the Head of Research and Enterprise at Birmingham

City University Business School. He obtained his PhD from the University of Manchester in 2001, and since then has published in a number of academic journals, principally studying the distribution of income, crisis, and work time. He is an editorial board member for Review of Political Economy, and Economic Issues. Xavier Pierron is Lecturer in Strategy at Napier Business School. He is currently

finalising his PhD with the University of Southampton in the Faculty of Engineering and the Environment on the circular economy, using behavioural economics principles to improve mobile and smart phones “circularity”. Xavier has degrees in Business, Management, and Process Improvements, as well as being a Senior Fellow of Higher Education. He is a proponent of the circular economy as he has experienced first-hand the plastic pollution evidenced in the Pacific Ocean during a sailing trip. He believes that achieving a circular economy will not only be beneficial to the environment, but will help countries and organisations gain more autonomy to access strategic and critical resources. Neil Renwick is Professor of Global Security at Coventry University, UK, spe-

cialising in Human Security and the relationship between international relations and sustainable development. He is a graduate of the University of Durham and the Australian National University. His research focuses mainly on China and East Asia, and he has published extensively in this field, including Northeast Asian Critical Security (Palgrave Macmillan). He is a former co-editor of the Ashgate Human Security book series. He is a Senior Associate Member of St Antony’s College, Oxford, and is a member of a number of international research institutes and professional organisations in this field of study. He has also acted as advisor to organisations such as UNDP Pacific, worked with staff at UNAIDS Asia-Pacific Office, and is a T20 policy advisor to the G20. He is a commissioned contributor to the China’s People’s Daily Chinese-language newspaper, CCTV and Shenzhen TV and is an invited member of the CCTV pool of international expert commentators. He is currently writing a book entitled China, Sustainable Development and South–South Cooperation, due for publication in late 2019.

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Krish Saha is Senior Lecturer in International Business at the Birmingham City Business School. His research interests include institutional influence on business performance, country governance, supranational institutions, and trade. Krish has published with acclaimed academic publishers primarily in areas of political risk, trade regulation, country governance and their impacts on business performance. He also advises businesses on policy impact and international trade regulations. Krish holds a PhD in trade economics and an MBA. James Silverwood is Lecturer in Emerging Markets at Coventry University. His

research interests include sustainable development and emerging markets. Aside from exploration of Ghana in this edited collection, James has also applied the dependent development model to challenge claims that the extractive industry has delivered a virtuous circle of economic growth in Peru. The chapter in this edited book is James’ second co-authored work with Dr Jeremy Moulton. Roman Teplov DSc (Tech.) is a postdoctoral researcher at LUT University. His

dissertation explores various approaches to open innovation perceived in companies of different size. Roman also holds a Bachelor degree in Mechanical Engineering. He has industrial experience as an R&D specialist and has been involved as a project manager and researcher in several international research projects. He has conducted research on innovation, social responsibility, ecosystems, and cross-cultural aspects. Roman has teaching experience in methodology and innovation courses. His research interests include technology and innovation management, entrepreneurship, open innovation, TRIZ, and advanced simulation systems. Juha Väätänen is Professor of International Business and Emerging Markets, and

Vice-Dean of the School of Business and Management at LUT University, Finland. His research focuses on international business, sustainable development, and social innovation. He has published in journals such as Multinational Business Review, Journal of Business Research, Industrial Marketing Management, and International Journal of Innovation Management, among others. Anna Veselova is Senior Lecturer at the Operations Management Department,

Graduate School of Management, St Petersburg State University, Russia. She is also a researcher at the Centre for the Study of Emerging Markets and Russian Multinational Enterprises. Anna has publications in a number of international academic journals (e.g. Human Resource Management, International Business Review, International Journal of Emerging Markets). Anna is a member of the Academy of International Business (AIB), the European International Business Academy (EIBA), and the European Association of Chinese Studies (EACS). Anna’s research interests focus on the international activities of emerging market firms, interrelations between firm’s strategic and structural characteristics, contextrelated specificities of human resource management, among others.

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Matthew Wilson is a faculty member in the Marketing and Hospitality depart-

ment at Central Michigan University in Mount Pleasant, Michigan, where he teaches undergraduate and graduate level marketing courses. In addition to teaching at CMU, Matthew is currently pursuing a PhD in Marketing from the KTH Royal Institute of Technology in Stockholm, Sweden. Before transitioning to academia, Matthew was Manager of Sustainability and Social Responsibility for the British Columbia Lottery Corporation in Vancouver, Canada. His professional career has included experience with clean tech venture capital, energy retrofitting, environmental assessments, sustainability reporting, corporate social responsibility and strategic management.

INTRODUCTION Sustainable economy and emerging markets Stefania Paladini and Suresh George

There is hardly a word more used than sustainability at present, alone or in combination with other concepts – “sustainable economy”, “sustainable development”, “sustainable growth”, and similar expressions. Sustainability is certainly one of the buzzwords of the decade, together with circular economy, crowdsourcing, and cloud computing – just to mention a few. Sustainable development is “viewed as a pattern of resource use that aims to meet human needs while preserving the environment” (Saxena and Khandelwal, 2010), or a journey where sustainable and inclusive growth needs to rewrite the rules of the market economy (Stiglitz, 2016) to become a mainstream political and economic discourse. The corporate world has recently shown an increasing interest in the matter, too (Massa et al., 2015). At a firm level, by using the managerial concept lens of corporate sustainability, a firm can embed sustainability across business operations as a key matrix to manage the firm’s environmental responsibility (Esfahbodi et al., 2016). And yet, the concept itself is older than it seems, and, in its current meaning, is rooted in the 1970s. The first use of the term “sustainable” in the modern sense was by the Club of Rome in March 1972 in its epoch-making report on the “Limits to Growth”, written by a group of scientists led by Dennis and Donella Meadows of the Massachusetts Institute of Technology. Describing the desirable “state of global equilibrium”, the authors used the word “sustainable”: “We are searching for a model output that represents a world system that is: 1. sustainable without sudden and uncontrolled collapse; and 2. capable of satisfying the basic material requirements of all of its people.” (UN, 2019, online)

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From the Club of Rome onwards, there were many other reports and international resolutions addressing the concept, a few of them becoming famous and cited worldwide such as the UN-World Commission sponsored “Our Common Future”, better known as the Brundtland Report. Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts: the concept of “needs”, in particular, the essential needs of the world’s poor, to which overriding priority should be given; and the idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs. (Brundtland, 1987, online) Therefore, as it appears, since the beginning the concept of sustainability was closely associated with environmental and societal aspects. This association will never go away; in time, however, other dimensions added to these original ones, from UN-promoted sustainable development goals (SDGs) (UNDP, 2019) to a series of multinational corporate practices that go under the collective definition of corporate social responsibility (CSR). More recently, the concept has extended to include circular economy, aimed at “redefining growth, focusing on positive society-wide benefits” and based on the three principles of “designing out waste and pollution, keeping products and materials in use and regenerating natural systems” (MacArthur Foundation, 2019, online). And if all the United Nations Member States have understood the importance of sustainable growth so well to include, in 2015, the 17 SDGs in the UN 2030 Agenda, emerging economies have at times found the practical applications of those principles and concepts challenging for a series of reasons. Results have therefore been at best mixed. In this book, a choice has been made: to provide a snapshot of the different dimensions of sustainability, while analysing how these dimensions interact in a specific contextual narrative, using selected emerging economies and case studies. The content is therefore divided in three separate parts, each examining a specific dimension, context, and narrative across 13 chapters: (I) The first part covers, in four chapters, the traditional dimensions of sustainability, regarded as a condition of equitable development, covering aspects of CSR and SDGs both in a macro perspective and as case studies of BRICS countries. (II) The second part of the book broadens the implications of sustainability, presenting, in four more chapters, a few case studies on the economic and political aspects of the phenomenon, together with exploring as sustainability translates into governance and democracy in emerging economies.

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(III) In the third part of the book sustainability is analysed in connection to other, more recent, dimensions, such as work conditions, industrial innovation, renewable energies, and circular economy, in five conclusive chapters. A short, closing section discusses how sustainability challenges and scenarios in emerging market contacts have been addressed in this book and how future research can address the possible challenges identified across this book. Each of the 13 chapters study one, or more, of these aspects, in a mixed approach, more theoretical than empirical at times while being embedded in the rationale of sustainability and sustainable economic growth. A majority of the chapters feature in the case studies or original research by the authors. The first chapter, “Dimensions of sustainability in impoverished contexts in emerging economies”, by Beninger and Wilson, introduces the context of sustainable development as being a dynamic process focused on five specific narratives: environmental, social, cultural, institutional, and the economic imperative which brings all of this together. Drawing out these narratives using insights from specific emerging market contexts, the authors provide evidence to provide context in which sustainability as an economic concept operates – an existing criticism of the overarching concept itself. The chapter also addresses how sustainability can be approached and implemented in improvised contacts, an important grouping within emerging economies using these five narratives or dimensions. The chapter deriving evidence from both extant literature in practice further examines these dimensions within 12 separate but important elements that comprise each dimension. By identifying a range of challenges, and possible solutions from real-world examples, Beninger and Wilson have tried to provide an insight into how potential trade-offs between these dimensions can be navigated by the reader. One of the key aspects of continuous debate in the sustainable developmental agenda, particularly in the emerging market context, is the inability of institutions and public sector organisations to tackle the issue of poverty. Income inequality is often used as the context for the differences in consumer behaviour between developed regions and the emerging regions of the world. Extant literature has also developed around the concept of “bottom of the pyramid” or BOP marketing segments as a target for multinational enterprises (MNEs) to exploit in emerging markets. It is in this context, where the impact of collaborative networks between multinational ecosystems and the public institutions of many emerging markets is often used as an intervention mechanism to increase social empowerment. However, evidence from literature while including successful cases of MNEs’ contribution to SDGs has also indicated a large number of cases where the empowerment of marginalised communities in emerging regions have failed. The second chapter, “Public–private partnership as a mechanism to encourage MNEs’ contributions to sustainable development goals” by Bremermann et al., explores this challenge using the notion that poverty alleviation and empowering

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poor societies are fundamental objectives of the UN 2030 Agenda for Sustainable Development. The involvement of MNEs is considered an important element in accomplishing sustainable development goals, and public–private partnership (PPP) is often an effective mechanism for securing MNEs’ engagement. The chapter aims at understanding the importance of public and private sector partnerships in supporting SDGs formed by the United Nations, mostly with a specific focus on poverty alleviation at the BOP, and it does it by applying a triangulation approach. The findings of the paper highlight several challenges that MNEs and the Brazilian government face during their collaboration. Yet another well-researched theme within the sustainable economy debate is the increasing attention to CSR, particularly in its use as a strategic tool in market entry. In the contemporary world of the sharing economy, where services such as Uber and Airbnb are increasingly disrupting traditional business models, companies have turned to the CSR sustainability agenda to boost corporate legitimacy, especially in new markets. As a “yardstick” of the discussion in the CSR field, legitimacy is one of the crucial factors of firm success (Hwang, 2019) and can also help organisations narrow institutional distance in emerging markets (Adeola et al., 2018). The inclusion of the CSR reporting by emerging market multinationals has been considered as a mechanism (Marano et al., 2017) by which alignment to global norms and expectations is used to gain acceptance in host countries. The third chapter, “MNEs’ sustainability challenges and corporate social responsibility in emerging markets: The case of Amway”, by Won-Yong Oh et al., also addresses MNEs and the issues of liability of foreignness (LOF) they face when they operate in foreign markets. It argues that CSR facilitates the process of overcoming LOF, especially in emerging markets, since CSR may enhance a business’s legitimacy in the eyes of local stakeholders. The chapter provides a case study on Amway, the US multi-level marketing (MLM) company. In particular, due to confusion over differences between its MLM business model and an illegal pyramid scheme, Amway has experienced controversies, especially in emerging markets such as India and China. The company’s CSR engagement leads it to build a reputation and legitimacy, which helps reduce its LOF and supports its international expansion as a strategy to gain legitimacy in emerging markets. Contributing to over 23% of global GDP, the BRICS group, individually and collectively, has the potential to make the single most important contribution to the sustainable development agenda (Gu et al., 2018), particularly in terms of how these states manage their energy security. The growth of emerging powers such as China, India, Russia, Brazil, and South Africa and their implications on sustainable development is reportedly understudied (Papa and Gleason, 2012). Yet, this group of states can collectively exert “sustainable development diplomacy” (Papa and Gleason, 2012) on the rest of the emerging economy groupings as well as the developed group of nations.

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It is in this context that the biggest emerging market economy, China, has been explored in the context of its biggest geopolitical initiative. Chapter 4, “The Belt and Road Initiative: Infrastructure and sustainable development”, by Renwick, explores instead China’s involvement with emerging economies in a dimension of South–South development in infrastructure since the 2000s. This chapter focuses more specifically on the extent to which President XI Jinping’s Belt and Road Initiative (BRI) contributes to achieving the UN Agenda 2030 and the already mentioned SDGs, agreed worldwide in 2015. After a theoretical discussion and an in-depth review of the ongoing projects, it shows that, although the Chinese way to development has been at times criticised by the rest of the world for lacking sustainability, BRI has, nonetheless, the potential to meet, and help the partner countries achieve, the 17 SDGs as in the plans. As the focus of the second part of this book addresses the economic and political aspects of sustainability using the governance and democratic political system lens, Chapter 5, “A tale of two debt crises: The IMF and the unsustainable development of Ghana”, by Silverwood and Moulton, continues with exploring the financial aspects of sustainable policies and development as an extension of the previous chapter on China’s infrastructure and sustainable development policy. Chapter 5 focuses on the West African state of Ghana, lauded in the past by the International Monetary Fund (IMF) as a model state in sub-Saharan Africa, for its achievements in economic development and transition to democracy. However, the sustainability of Ghanaian economic development in recent years has been questioned; the chapter aims at evaluating its feasibility, by understanding how, and why, Ghana has followed an unsustainable developmental trajectory since the debt crisis of the 1980s, developing a financial dependency on multilateral and bilateral donors and leading the country to the verge of another debt crisis four decades later. Another perspective, this time focusing on enterprises and social capital, is provided by Chapter 6, “Political economy of small-to-medium enterprise (SME) finance: Lessons from Root Capital”, by Doyran. The chapter discusses how social investment funds could serve as a model for commercial success, examining the prospects and challenges for SME finance in developing countries. Using the US-based Root Capital nonprofit fund as a case study in social impact lending, it examines the business model of stakeholder-oriented financial institutions that lend to rural small businesses in the hope of fostering growth in developing countries, evaluating the business strategies of impact lenders in social enterprise/developmental agendas. Chapter 7 analyses more specifically the dimension of governance. “Perspectives on governance and development of sustainable economy: Institutional policies, challenges, and scenarios in Kenya” by Amayo, highlights evidence of popular and neglected perspectives in policy, theory, and practice in sustainable development advocacy, using Kenya as a case study. The chapter offers an assessment of the current theories and the development of new theoretical and practice-based perspectives in the field of globalisation, governance, corruption, and

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sustainable development. A key question raised in the chapter is the examination of the role of governance of institutions in safeguarding development aspirations in developing countries such as Kenya. It identifies axes of further research in the ontology of governance and corruption (e.g. causes, individual perspectives, and institutional responses) and in the role of the state in economic development. On the other hand, Chapter 8, “Democracy, sustainability, and economic growth: The case of Bangladesh’s garment industry”, by Saha and Paladini, discusses the linkage between democracy and globalisation on one hand and democracy and sustainability on the other in the context of the clothing industry, which is central to Bangladesh’s economic development, even in the sense of a more sustainable growth. This is the reason why it is deemed so important to study its trends and evolution, especially in terms of governance and the shift towards sustainability, using an empirical study carried out with a trade gravity approach. While a direct relationship between sustainability, democracy, and trade has not been empirically demonstrated, the preliminary results presented in this chapter suggest nonetheless the existence of a linkage. For business operating around and in emerging regions to engage with the sustainable business agenda, there would need to be a clear linkage between the role of technology, disruption, globalisation, the role of institutions in managing and encouraging innovation, and a greater return on investment in corporate sustainability strategies. Although the academic literature suggests that the role of government is to create enabling environments in which businesses can deliver on sustainability goals, (Scheyvens et al., 2016), the need for organisations to act as transformational agents in pushing the sustainability agenda is also evident. Therefore, it becomes imperative to look at specific examples of how the dynamic and ever-changing global business environment is forcing changes across industry and practices. The third part of this book addresses this aspect across five chapters. Chapter 9, “Work time and environmental impact in a global perspective”, by Arntsen and Philp, explores the links between extensive labour utilisation and commodity production, drawing on a plurality of conceptual and policy perspectives, and applies this theoretical framework to emerging economies. The chapter discusses the historical development of Western economies from the industrial revolution onwards, to latter development in Southeast Asia and beyond. The ramifications of this growth in commodity production and associated consequences for global sustainability are explored in detail and then evaluated in terms of outcomes. The chapter builds on earlier work by the authors to explore the commodity mix as a key aspect of sustainable development. A key aspect of integrating sustainable development into the emerging market discourse is to examine how international supply chains that start or end in emerging regions change character when embedded in specific country-state-sectorial narratives. Emerging markets are important as they comprise a majority of the world’s people and land and also continue to grow faster than the “emerged” or advanced economy

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(Kearney, 2012). It is also important that the narrative should include the flow of manufacturing away from the traditional BRICS states into secondary emerging markets (Rauch et al., 2016) that are poised to take over as clusters of manufacturing. The rise of emerging markets will also be important as a new intense wave of consumption (Mckinsey, 2012) begins in emerging regions, creating new consumer classes and market segments. Therefore, one expects that new methods of disruptive manufacturing are expected to find traction in emerging markets, particularly when they complement existing production networks (Sasson and Johnson, 2016). Sustainability in global supply chains plays here an important role, due to their ability in driving business innovation in both traditional sectors, as in the clothing industry and in the energy sector. Following on from what has already been explored in Bangladesh’s garment industry, Chapter 10, “Green innovation in South Asia’s clothing industry: Issues and challenges”, by Khattak, defines green innovation as the adoption of technological, organisational, and social practices that create fewer or have no harmful environmental impacts. Consumers, civic organisations, and local authorities in developed countries are increasingly becoming concerned about the ways in which firms are treating the environment, particularly those firms engaged in clothing manufacturing. In the clothing industry, many firms have outsourced manufacturing processes to low-cost developing countries, in which, however, low social and environmental standards have begun to rise to avoid being excluded from buyer firms’ networks in developed countries. The chapter examines the challenges four pioneer clothing firms in the South Asian region faced in embarking on green innovation initiatives, managing to embrace green innovation and setting a trend in an industry where the term “green” was not known yet. Kaartemo’s “Designing business models to overcome the barriers to renewable energy market creation in developing and emerging countries: Masar Box, a case study” explores renewable energy sources in a case study approach. Chapter 11 follows Masar B.V., a Dutch smart energy startup that provides mobile solar energy solutions in the Middle East and North Africa (MENA) to accelerate the region’s transition to renewable energy, primarily solar. The case highlights the mismatch between the customer needs in emerging markets and the investor needs in global finance markets, due to the insufficient presence of institutions and institutional arrangements. Masar’s activities in starting up business in emerging markets can be considered as an example of institutional work that aims at creating and shaping institutional arrangements; the chapter showcases how startups are not only constrained by institutions but, through agency, they are also able to create and shape institutional arrangements. The final two chapters explore sustainability in the context of circular economy. Chapter 12, “Innovative business models towards sustainability: specificities and challenges on the Russian market” by Veselova, Aray, Levchenko, and Knatko, shows how business models based on circular economy and share-economy concepts are applied by Russian companies. The chapter adopts the institutional theory as a core to develop the definition of what it means to be a successful company, or company’s

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business model, and how this success has to be legitimised in the institutional environment of reference. Generally, institutional environment consists of a regulatory element (government policy and regulation), cognitive element (knowledge and skills) and normative element (shared values), and it is effective only if both formal and informal institutions are taken into consideration. It then analyses various aspects of the Russian business context, which create challenges for companies when introducing and implementing sustainable practices and innovative business models based on the sustainable principles discussed above. The aim of the chapter is to identify specific features of innovative business models (of circular economy type), isolating the factors that cause specificity in the Russian context. Finally, Chapter 13, “E-waste and sustainability in a changing environment: A Behavioural Economics approach”, by Pierron, discusses e-waste and its relevance in the context of circular economy, both in advanced and emerging economies. E-waste (WEEE) is one of the fastest growing waste streams in the world, due to a combination of increase in electronic product shipments and stagnation of collection and recycling rates. According to UN data, in 2016 more than 45 million tonnes of e-waste were generated. Mobile and smart phones only weigh a few hundred grams at most and individually they now surpass the number of humans on earth with an estimated 7.2 billion devices in activity. This is why terms such as urban mining – the process of reclaiming compounds and elements from products, building, and waste – have come to feature prominently now in the economic policy of some countries to address the issue, and have done so more in the general circular economy. The circular economy framework is now at the core of the European Commission’s (EC) long-term strategy with the adoption of the Circular Economy Package strategy for a resource-efficient Europe, and it can successfully be replicated in other contexts, such as emerging economies. It follows a cradle-to-cradle approach from the beginning of products’ life to waste recycling (plastic, food, construction, and demolition), as well as advocating reduce and reuse. Based on this data and findings from field data analysis, the chapter presents an original approach that the building of behaviour economics advances a successful strategy to help waste management and reusability. The editors have aimed to discuss the core themes of contemporary sustainability across specific industries, institutional settings, and organisational dynamics, even though the vastness of the topic and the constraints of limited space have required difficult decisions to be made in the choice of the contributions. The idea is also that the articles presented in this selection can be a source of reference for practitioners or the firms that try to achieve a competitive advantage using sustainable choices in doing business in emerging markets.

References Adeola, O., Boso, N., and Adeniji, J. 2018. “Bridging institutional distance: an emerging market entry strategy for multinational enterprises.” In J. Agarwal, and T. Wu (eds), Emerging Issues in Global Marketing (pp. 205–230). Champaign, IL: Springer.

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Brundtland, G. 1987. Our common future. Report of the World Commission on Environment and Development. UN. New York. Esfahbodi, A., Zhang, Y., and Watson, G. 2016. “Sustainable supply chain management in emerging economies: trade-offs between environmental and cost performance.” International Journal of Production Economics, Elsevier, 181(PB), 350–366. Gu, J., Renwick, N., and Xue, L., 2018. “The BRICS and Africa’s search for green growth, clean energy and sustainable development.” Energy Policy, 120, 675–683. Hwang, J., 2019. “Managing the innovation legitimacy of the sharing economy.” International Journal of Quality Innovation, 5(1), 1–21. Kearney, C., 2012. “Emerging markets research: trends, issues and future directions.” Emerging Markets Review, 13(2), 159–183. Mac Arthur Foundation, 2019. MacArthur Foundation Home Page. [online] Available at: www.macfound.org/[Accessed 27 February 2019]. McKinsey, 2012. Manufacturing the future: the next era of global growth and innovation, A report by Manyika et al. November, 2012. Available on www.mckinsey.com/businessfunctions/operations/our-insights/the-future-of-manufacturing [Accessed 22 February 2019]. Marano, V., Tashman, P., and Kostova, T., 2017. “Escaping the iron cage: liabilities of origin and CSR reporting of emerging market multinational enterprises.” Journal of International Business Studies, 48(3), 386–408. Massa, L., Farneti, F., and Scappini, B., 2015. Developing a sustainability report in a small to medium enterprise: process and consequences. Meditari Accountancy Research, 23(1), 62–91. Papa, M. and Gleason, N.W., 2012. Major emerging powers in sustainable development diplomacy: Assessing their leadership potential. Global Environmental Change, 22(4), 915–924. Rauch, E., Dallasega, P., and Matt, D.T., 2016. “Sustainable production in emerging markets through distributed manufacturing systems (DMS).” Journal of Cleaner Production, 135, 127–138. Sasson, A. and Johnson, J.C., 2016. “The 3D printing order: variability, supercenters and supply chain reconfigurations.” International Journal of Physical Distribution & Logistics Management, 46(1), 82–94. Saxena, R. and Khandelwal, P.K., 2010. “Can green marketing be used as a tool for sustainable growth? A study performed on consumers in India – an emerging economy.” The International Journal of Environmental, Cultural, Economic and Social Sustainability, 6(2), 277–291. Scheyvens, R., Banks, G., and Hughes, E., 2016. “The private sector and the SDGs: the need to move beyond ‘business as usual’.” Sustainable Development, 24, 371–382. Stiglitz, J.E., 2016. “An agenda for sustainable and inclusive growth for emerging markets.” Journal of Policy Modeling, 38(4), 693–710. UN, 2019. Road to Rio. Rio + 20 Portal. [online] Available at: https://rio20.un.org/resolutionsmore [Accessed 27 February 2019]. UNDP, 2019. Sustainable Development Goals | UNDP. [online] Available at: www.undp. org/content/undp/en/home/sustainable-development-goals.html [Accessed 27 February 2019].

PART I

1 DIMENSIONS OF SUSTAINABILITY IN IMPOVERISHED CONTEXTS IN EMERGING ECONOMIES Stefanie Beninger i and Matthew Wilsonii

Introduction Sustainability has emerged as an important topic across industry, academia, and governments alike. The Brundtland Commission’s report, formally called the World Commission on Environment and Development (1987), is often credited with making sustainability – also characterized as sustainable development1 – mainstream: It conceives of sustainable development as a dynamic process focused on four imperatives: safeguarding the environment (the environmental imperative), strengthening cohesion by enabling justice (the social imperative), and securing participation in decision making (the institutional imperative), all of which are sustained by a vibrant economy (economic imperative) (Spangenberg, 2004). These imperatives, with a “core objective … to provide to everybody everywhere and at any time the opportunity to lead a dignified life in his or her respective society” (Spangenberg, 2004, p. 2), are often categorized as dimensions of sustainability. Indeed, most frameworks include the dimensions of economic, environmental, and social sustainability, while others also include an institutional dimension (Labuschagne et al., 2005) and, more recently, a cultural dimension (Soini & Birkeland, 2014). In the literature about sustainability, there is currently no consensus regarding the right number of dimensions (Waas et al., 2011) and frameworks exhibit heterogeneity in their choice and content of dimensions (Labuschagne et al., 2005). Despite a growing interest in evoking concepts of sustainability, an overarching – and holistic – framework on how to approach these contexts is missing. Further, much research on the nexus between business and poverty focuses only on one or two dimensions of sustainability (see Kolk et al., 2014), neglecting the interplay i ii

IE Business School, IE University, Spain Central Michigan University, Marketing and Hospitality Services

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among its various dimensions. Drawing on these five dimensions of sustainability – economic, social, environmental, institutional, and cultural – we intend to present a set of twelve underlying elements of sustainability that can be a useful lens with which to approach business activities in impoverished contexts, an important group in emerging markets. We also explore how the twelve elements of these dimensions relate to research on and practice in impoverished contexts, as well as discussing trade-offs that exist between these dimensions. In order to provide a practical approach to sustainability, we have sought to strike a balance between generalizability and specificity regarding the twelve underlying elements. These elements go beyond providing a broad overview of the various dimensions of sustainability, while still remaining at a higher level than specific sustainability metrics developed at the company level (such as GRI G4; ISO 26000; SA8000), which can be too detailed and difficult to tailor to a manager’s approach to business in these contexts (Kaptein & Wempe, 2001). Our comprehensive approach is thus specific enough to account for the idiosyncrasies of these contexts while still generalizable enough to the overarching commonalities. Overall, this approach builds on prior work such as London’s (2009) framework of specific sustainability metrics at both local individual and community level, including regarding economics (such as income, debt, and productivity levels), capabilities (such as training and education, health, and morbidity outcomes), and relationships (such as social status and gender equality). This also answers calls to bring a holistic approach to business in poverty (Viswanathan et al., 2009). This is especially important, given the sheer number of those living in impoverished contexts in emerging economies and the related impact on sustainability (Jose, 2008). Poverty is difficult to quantify, as poverty is a multifaceted phenomenon involving deprivations in money, education, services, health, and security (World Bank, 2018). Nonetheless, the World Bank has collected data through household level data for decades towards quantifying and tracking the phenomenon. They estimate that over 735 million people live in extreme poverty as of 2015, defined as those living on less than $1.90US a day (World Bank, 2018). Even at a higher poverty line, that of $3.20US per day, over 26% of the world’s population falls below that cut off (World Bank, 2018). This finding indicates that approximately 2 billion people worldwide live on less than $3.20US a day. While poverty affects every region of the globe, almost half of the world’s poor living under this amount reside in South Asia and Sub-Saharan Africa (see Table 1.1), with over a quarter of the world’s poor living in India, and Nigeria coming close to matching that rate (World Bank, 2018). People living under the poverty line are also disproportionately young, where over 60% of the world’s poor are estimated to be under the age of twenty-four years (World Bank, 2018). Those in impoverished contexts in emerging economies generally share several important contextual variables, although experiences vary across regions and at different incomes. These individuals are vulnerable to external shocks due to a lack of consistent access to resources (Hahn, 2009), and tend to pay more for their products

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TABLE 1.1 Overview of global poverty

Global Region

Sub-Saharan Africa South Asia Middle East and North Africa Latin American and Caribbean Europe and Central Asia East Asia and Pacific Rest of the world

Regional poverty rates (estimated in 2015)

Number of extreme poor (estimated in 2015)

Total Population (estimated between 2010–2015)

41.1% 12.4%

413.3 million 216.4 million

1,005.6 million 1,744.2 million

5.0%

18.6 million

371.6 million

4.1%

25.9 million

626.5 million

1.5% 2.3% 0.7%

7.1 million 47.2 million 7.3 million

487.0 million 2,036.6 million 1,083.6 million

Source: Authors’ elaboration on World Bank data, 2018

and services than those in wealthier contexts do, a phenomenon named the ‘poverty penalty’ (Prahalad, 2005). Isolation, borne from the lack of infrastructure, can lead to geographical and social exclusion (London, 2009). Although they have little in the way of tangible resources and face unstable incomes (Anderson & Billou, 2007), strong relationship networks provide access to resources (Viswanathan et al., 2014), as do community resources (Beninger & Francis, 2016), such as generationally transmitted traditional knowledge including technical, ecological, and medical know-how and abilities (WIPO, n.d.). However, these contexts can be fraught with a lack of formal institutions, which are typically available to wealthier counterparts, such as access to banks, communication platforms, and energy grids (Prahalad, 2005). In what follows, we describe the twelve key elements within the five dimensions of sustainability (see Figure 1.1), highlight how each element relates to these contexts, discuss challenges facing managers regarding each element, provide suggestions to overcome these challenges (findings are summarized in Table 1.2), and discuss trade-offs between the dimensions. Ideally, these elements will prompt discussion within organizations on ways to improve sustainability outcomes, as well as contributing to a broadened discussion of sustainability in these contexts in academic literature.

The dimensions of sustainability As specified above, we present here a comprehensive approach to sustainability, which includes economic, social, environmental, institutional, and cultural dimensions. We will also draw on the existing literature of sustainability to identify a set of

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Environmental

Economic

• Regeneration, preservation, & efficient use of natural resources

• Financial performance

• Precautionary principle

• Economic contribution • Needs provision

Cultural

Social

• Heritage

• Social equity

• Vitality

• Social cohesion

Institutional • Participation

FIGURE 1.1

The five dimensions of sustainability

twelve underlying elements capturing several of the principles underlying the abovementioned five dimensions of sustainability. These are described in turn below. (a) The economic dimension Economic growth and a vibrant economy are often seen as the foundation for other dimensions of sustainability, as they generate wealth, provide employment, and educate (Spangenberg, 2004). Financial performance and economic contribution are the two key elements of the economic dimension. Financial performance refers to the financial stability of an organization and is frequently captured by metrics such as liquidity, profitability, and solvency (Labuschagne et al., 2005). Financial performance has long been a focus of literature related to businesses in general, and in these contexts in particular. However, literature is increasingly focusing on the wider contribution to communities, such as fostering livelihoods and opportunities, sustaining the local economy, and facilitating new buying power (Viswanathan et al., 2009), which are related to the following element: economic contribution. Economic contribution represents the broader economic impact of an organization on its stakeholders and its local economy (Labuschagne et al., 2005). Economic contribution can be captured by metrics such as contribution to a region’s gross domestic

Social Dimension

Social impact assessments Merit-based hiring and promoting Reducing pay gaps

•

Social equity

• •

Needs Provision

Making presumption Lack of understanding about needs • Cultivating desires for nonessential or harmful items Some individual control resources, including information

Pressure for profit Pressure to maximize profits

• •

Economic contribution

•

•

•

•

•

•

•

Appropriate solution with high volume sales Flexible, low cost, and long-term orientation Provide incomegenerating opportunities Set limits and measure economic contribution Involving local stakeholders Identifying nonowner-base solutions

•

Unstable cash flows Price sensitivity

• •

Financial performance

Economic Dimension

Possible Solutions

Challenges

Element

Dimension

TABLE 1.2 Potential challenges and solutions for sustainability dimensions

(Continued )

Eskom(UN, 2007)

The TanzanianFederation of theUrban Poor(Lindeman, 2014)

Honey care Africa

Hatton National Bank’s BarefootBanker(Elaydi and Harrison, 2010)

Illustrative

Environmental Dimension

Dimension

TABLE 1.2 (Cont.)

Lack of innovations and technologies

Lack means to assess risks, future costs and benefits Urgent need for products and services

•

Precautionary principle •

•

•

•

•

• •

•

Rethink solutions Reconfigure supply chains Participate in local innovation competitions Use existing efficient solutions Perform risk assessments; cost benefits and uncertainty analyses Rigorous evaluation processes of inputs

Implement community-based initiatives

The Body Shop (Jedlicka, 2009)

D. light Solar

La Cruz Habitation Protection Project (Gau et al., 2014) Azmeraw Zeleke (Beninger & Robson, 2014)

•

• •

• •

• • •

Efficient use of natural capital

Preservation of natural capital

Regeneration of natural capital

•

Coffee producer’sprojects (Kolk et al., 2014)

•

Engage with all community members Understand differences in power and privilege within communities Potential lack of trust Few business models designed for regeneration Pressure to drive down cost Natural resources necessary as inputs

•

Socialcohesion

Involve those with deep knowledge Provide training Increase transparency Deliver on promises

Illustrative

Possible Solutions

Challenges

Element

Cultural Heritage

Cultural Dimension

Cultural vitality

Participation

Institutional Dimension

Difficulty knowing what constitutes heritage Tension between preserving heritage and using it for economic gain

Lack of knowledge about processes leading to vitality Pressure to engage in scaling solutions

•

• •

•

•

Lack of access to global knowledge networks Cultural biases against board-based participation

•

•

•

•

•

•

•

• •

• Use available communications media Capabilities focus Structure organization to facilitate voice Cultivate cultural understanding Adopt policies that prioritize protection of heritage Train and educate stakeholders Take into account local practices Build flexibility into supply chains Add local context to solutions

Mozilla (AFP Relaxnews, 2014)

Traditional Knowledge Digital Library (Chakravarty, 2010)

Indian Department of Posts (Vachani & Smith, 2008)

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product and distribution among cost categories including local wages and operating costs (Global Reporting Initiative, 2013). While business research on economic contribution within income-constrained contexts is limited, the notion of increasing consumers’ real income through initiatives such as buying from local organizations or “creating opportunities for steady employment at reasonable wages” (Karnani, 2007, p. 104) is beginning to be addressed. There are a number of challenges, however, with striving to improve financial performance and economic contribution. Those in income-constrained situations have low and unstable income (Karnani, 2007), which are obvious challenges to the financial performance of organizations. However, cultivating innovative low-cost offerings and high-volume sales is a step towards overcoming this challenge, which can be accomplished through ensuring awareness, affordability, and availability of accessible products and services (Prahalad, 2005). To do so, scholars have noted that an organizational orientation focused on flexibility, low structural costs, and a long-term focus, in addition to a deep understanding of the local context, is needed (Pitta, Guesalaga, & Marshall, 2008). For example, Hatton National Bank in Sri Lanka successfully instituted a program called ‘Barefoot Banker’ which relied on deep immersion in the local context and longer time horizons (Elaydi & Harrison, 2010). Ensuring economic contribution to the community can be challenging due to pressures to maximize profit, which often come at the expense of spending in other cost categories (e.g. wages). Further, a company’s repatriation of fortune, rather than reinvesting into the community, could undermine economic contribution (Davidson, 2009). To tackle these challenges, managers can strive to provide viable employment, such as by involving individuals from local communities in business activities (Laczniak & Santos, 2011; Weidner et al., 2010). In this way, incomes can be increased and stabilized. Further, setting goals, such as on repatriating only a predetermined amount and measuring economic contribution, can help. London (2009) developed a framework of metrics regarding potential economic factors with regards to local stakeholders at the community level, including measuring incomes of existing businesses, the amount of new jobs, businesses and other economic opportunities created, as well as tracking the impact on community infrastructure. Scholars and practitioners can use these aforementioned metrics to measure their economic contribution and to help ensure that economic contribution is being attended to. For example, Honey Care Africa, an organization sourcing honey from rural farmers, measures the number of farmers who improved incomes through these honey-generating activities. (b) The social dimension The social dimension is broad in conceptualization and spans the internal operations of the organization, its stakeholders, and the broader community (Labuschagne & Brent, 2006). Within this dimension, we identify social equity, needs provision, and social cohesion as three important elements.

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Social equity, defined by Murphy (2012) as the distribution of welfare goods and opportunities based on fairness to give equal opportunity to all, can refer to fairness in the provision of public services (Cuthill, 2010), pay raises, and rule administration (Dittrich & Carrell, 1979). Needs provision centers on alleviating poverty through enabling stakeholders and communities to meet their needs. For example, Jose (2008) noted that a sustainable approach requires both meeting the needs of those in poverty and creating access to needed benefits. Social cohesion is a state of felt unity between individuals that brings and provides benefits (Chan, To, & Chan, 2006). Social cohesion originates from both the quality and types of social interaction and emphasizes tolerance, intertwining personal and community identities, effective informal social control, and high levels of social interaction (Dempsey et al., 2011, Forrest & Kearns, 2001). Fostering social equity in impoverished contexts can be especially challenging, given power differentials, whereby certain individuals can control the flow of information and other resources into and within a community (Arora & Romjin, 2012). In order to foster social equity, managers can ask critical questions regarding who is impacted by decisions and in what way. Managers can also aim to foster social equity through policies such as merit-based hiring and promoting, while reducing the pay gap among organizational levels. For instance, the energy company Eskom developed employment equity policies and indicators to ensure gender equity, affirmative action, and the rights of people with disabilities in Africa (United Nations, 2007). Challenges exist in providing for the diverse needs of impoverished groups in emerging economies, thus undermining needs provision. While some activities can have positive outcomes on a community’s needs provision, such as through providing education and improving physical resources (London, 2009), the outcomes can also be perceived as negative, such as by cultivating a desire for nonessential (Davidson, 2009) or harmful items (Karnani, 2007). As such, it is important to identify the specific needs of individuals in any given impoverished context (Subrahmanyan & Gomez-Arias, 2008) and how these can impact other members of the community. Beyond just conducting market research, it is essential to involve other entities, including local individuals, governments, and non-governmental organizations (Prahalad, 2005) in decision-making activities. Further, needs provision does not necessarily denote ownership, requiring a mindset shift “to one of increasing benefit ownership and asset control” (Jose, 2008, p. 201). As such, shared ownership schemes can be useful. For example, local individuals from a group savings network, called The Tanzanian Federation of the Urban Poor, worked together to research, advocate for, and create affordable housing for the community (Lindeman, 2014). Social cohesion can also be challenging. Specifically, it can be difficult to engage with all members of the community (Ansari et al., 2012) and to thoroughly understand differences in power and privilege (Arora & Romijn, 2012). To attempt to tackle these challenges, managers can strive to involve those with

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local knowledge through strategic hiring and partnerships (Prahalad, 2005), while training can be given to members of the community, a tactic previously employed with small coffee producers (Kolk, 2014). However, organizations need to be respectful of local traditions or norms (Ansari et al., 2012), while fostering trust within the community is often considered essential to success in these contexts (Viswanathan et al., 2009). Indeed, organizations can strive to gain the consent of the community, understand differing worldviews, take a long-term view, and improve local capacities through their activities (Beninger & Francis, 2016). (c) The environmental dimension Environmental sustainability can be understood as the maintenance of natural capital (Goodland, 1995), which refers to all natural assets such as soil and groundwater that can be used and modified by humans, but cannot be created by humans directly (Jabareen, 2006). Goodland (1995) advocates for three interconnected priorities as major focus areas to preserve natural capital: preservation of natural capital, regeneration of natural capital, and efficient use of natural capital. In addition, we consider the precautionary principle, a foundational principal in of the Brundtland Commission. Those in poverty tend to rely heavily on environmental resources (Hahn, 2009). As such, it is imperative that there is preservation of natural capital. To aid in this preservation, proactive activities include keeping discharges below the assimilative capacity of the natural environment and setting the depletion of non-renewable resources below humans’ capacity to invent renewable substitutes (Goodland, 1995). Regeneration of natural capital refers to ensuring the renewal of used natural resources. For example, regeneration of natural capital can involve planting trees after deforestation and cultivating habitats for indigenous plants and animals. These are important elements, as the degradation of natural capital can have disproportionate harm on those in poverty (Arnold & Williams, 2012). The efficient use of natural capital is also essential in order to avoid wasteful activities that undermine the preservation and regeneration of the natural environment, both in the short and long term. While business scholars advocate for the judicious use of natural capital in contexts of poverty (Jose, 2008), there has been a failure to acknowledge the impact business activities can have on the natural environment, such as by Unilever’s single serve packages (Arnold & Williams, 2012), which are a frequent marketing technique employed in emerging markets. The final element of the environmental dimension is the precautionary principle, which refers to opting to forgo benefits today rather than risk incurring possibly catastrophic environmental costs in the future (Ekins, 2003). The precautionary principle is especially important, given that developing contexts are more vulnerable to environmental issues than are individuals in developed countries (Barbier, 2012).

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A major challenge related to natural resources is that they are necessary for many business activities. Nonetheless, steps can be taken to preserve resources such as through rethinking product and services. For example, solar ovens can replace environmentally intensive firewood ovens (Viswanathan et al., 2009), reusable containers can be used instead of single-use packaging, such as in products in rural India (Arnold & Williams, 2012), and community-level solutions can be pursued, such as installing water stations instead of bottled water (Varadarajan, 2014). Additionally, the local context can provide insights into ways to preserve natural resources. For example, impoverished consumers demonstrate a tendency to creatively repurpose items instead of purchasing items: for example, an Ethiopian entrepreneur, Azmeraw Zeleke, converted old mortar shells into coffee machines (see Beninger & Robson, 2014), while community-held knowledge can provide ways to manage local ecosystems (Subramanian, 2010). Although there are few business models designed for regeneration of natural capital, recent literature indicates that marrying business with regeneration might be possible on a community level (Gau et al., 2014). For example, an organization in Mexico, La Cruz Habitation Protection Project, is a community-based initiative focused on reforesting using locally sourced resources. These areas have been replanted, increasing natural capital reserves such as fish populations and soil quality, while creating a sustainable lumber industry and contributing to the resurgence of nature (Gau et al., 2014). To increase the efficient use of natural capital, organizations can reconfigure their supply chains to emphasize the reuse of materials (Klassen & Vachon, 2012), drawing on approaches such as Cradle to Cradle and the Circular Economy. However, increasing natural resource efficiency in these contexts can be problematic due to limited funds and short time horizons held by many organizations. Nonetheless, there are different innovations already developed and working in other contexts, but not yet scaled to other communities. An example of a company that is helping contribute to the judicious use of natural resources in poverty is D.Light Solar. This organization offers a range of solar lanterns and batteries, and has sold over 20 million solutions in rural low-income markets across sixty-five countries, with hubs in Africa, the Americas, and Asia. These products provide electricity and light, replacing more destructive options such as charcoal, wood, and other natural products. The solar lanterns could be brought into even more communities to support the efficient use of natural resources. The precautionary principle involves tackling preventive action through exploring different alternatives and involving the public in decisions: at its core, it “encourages policies that protect human health and the environment in the face of uncertain risks” (Kriebel et al., 2001, p. 871). It is often critiqued for being costly, for potentially inhibiting development, and for being difficult to apply in practice, given the difficulty of assessing risks and the prevalence of uncertainty inherent in many practices (Tickner et al., 1999). In addition, some individuals in these contexts have an urgent need for certain products and

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services, making it difficult to justify holding back products in the short run to employ the precautionary principle. However, some approaches to implementing the precautionary principle can help, include evaluating decisions through risk assessments, cost–benefit, and uncertainty analyses (Farrow, 2004), as well as rigorous process evaluation, as illustrated by Body Shop’s procurement policy (Jedlicka, 2009). (d) The institutional dimension The institutional dimension centers on securing the effective participation and voice of stakeholders in the pursuit of sustainability (Pfahl, 2005). Institutions can foster sustainability through integrating decision-making processes among various bodies (Spangenberg et al., 2002). For institutions to be effective in this, they must ensure that individuals and communities can express their concerns and interests, while striving to balance those in decision-making processes (Pfahl, 2005). In the context of sustainability, participation refers to providing access to information, capacity-building, and meaningful influence with stakeholders who have a recognized interest in the focal decision (Labuschagne & Brent, 2006; Spangenberg et al., 2002). In this way, participation involves cultivating an understanding of and working with local groups (London & Hart, 2004). Access to information is problematic to participation: Many countries do not guarantee freedom of information, as indicated by not having legislation or enforcement inline with international standards set forth by the United Nations (UNESCO, 2010). For example, many countries struggling with poverty, such as Eritrea, Vietnam, and Sudan, score among the lowest in the world for freedom of press (RSF, 2018). Additionally, those in poverty often lack reliable access to knowledge networks, including education and the Internet (Shivarajan & Srinivasan, 2013). For example, only 22% of the 1.2 billion people in India are connected to and use the internet (Poushter, 2016). A potential solution to this is using locally relevant forms of communication to inform and involve stakeholders, such as billboards and theatre (see Beninger & Robson, 2015), as well as innovative services. For example, the Indian Department of Post offers email solutions for individuals who lack internet access: Email messages arrive and are printed at a post office, and then delivered to the recipient (Vachani & Smith, 2008). In this way, they have overcome limited access to knowledge networks while leveraging the infrastructure that does exist. Regarding building capacity, the focus can be on increasing capabilities in skilled domains (Ansari et al., 2012), including data analysis and communication skills. For example, managers could attempt to develop these capacities, such as through offering skill-building programs and supporting accessible education services to employees and communities. Finally, granting influence involves giving a range of individuals a voice in decision making: flattened hierarchies at the organization and community meetings could help foster inclusion, for example. It is imperative to include

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a diversity of community members, especially those who are traditionally disenfranchised. To do this, the political and social structure of a community needs to be first understood. This approach is important, as it is thought to be a means to overcoming social exclusion, a priority in many impoverished contexts, as exclusion can increase an individual’s likelihood of falling back into poverty (Shivarajan & Srinivasan, 2013). (e) The cultural dimension While traditionally overlooked in discussions of sustainability, many scholars conceive of cultural sustainability as its own dimension and emphasize the importance of preserving cultural resources (Soini & Birkeland, 2014). Within this dimension, we focus on two major identified elements: cultural heritage and cultural vitality. Cultural heritage is concerned with preserving a community’s cultural capital, including built environment, artifacts, and components of the natural environment imbued with traditional significance (Spennemann, 1999). For instance, competing products, changes in land use, and global warming altered traditional North American maple syrup farming practices which are seen as integral parts of North American identity and history (Whitney & Upmeyer, 2004). Cultural vitality is defined as “evidence of creating, disseminating, validating and supporting arts and culture as a dimension of everyday life in communities” (Jackson et al., 2006, p. 4). As local cultures change, cultural vitality is concerned with how change occurs, so that it does not damage the continuity or identity of that culture (Soini & Birkeland, 2014). Scholars focused on business in impoverished situations encourage designing offerings in a way that sustains culture (Viswanathan et al., 2009). The primary challenge of preserving cultural heritage in impoverished contexts is the need to understand what constitutes a community’s cultural heritage. For example, “values regarding traditional customs” (London, 2009, p. 108), indigenous knowledge (Arora & Romijn, 2012), and locally created products and services (Beninger & Francis, 2016) can be important to cultural heritage. Partnering with impoverished community members in a legal and ethical way that prioritizes the protection of cultural heritage can help identify and respect cultural heritage (see Beninger & Francis, 2016). This approach could involve, for example, providing training to stakeholders around how to recognize and respect cultural heritage. For example, organizations in India instituted a multilingual repository of traditional knowledge called the Traditional Knowledge Digital Library as a way to preserve cultural heritage and safeguard it against unsanctioned use (Chakravarty, 2010). Challenges regarding cultural vitality are borne through the pressure for organizations to engage in “scaling and transporting solutions across countries, cultures, and languages” (Prahalad, 2005, p. 25). A monolithic approach cultivated by these

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scaled solutions may undermine cultural vitality. However, business activities can strive to reflect local cultures through encouraging consumers and distributors to modify activities to reflect the local situation (London & Hart, 2004) in a way that is respectful of local practices and customs. For example, Mozilla is launching a low-cost smartphone into the Indian market that allows for the easy creation of hyper-local and multi-language apps and retails for less than $30US.

Approaching dimensional trade-offs While much scholarship on organizations and sustainability centers on a ‘win– win’ paradigm that assumes at least some level of harmony among all elements, win–win approaches can be overly simplistic: trade-offs can and do exist (Hahn et al., 2010). For example, the economic and social dimensions can trade-off: while branding may increase a provider’s financial performance, the higher prices of equivalent branded products may undermine the financial position of consumers (Davidson, 2009), thereby undermining the social dimension. Likewise, focusing on capitalizing on lower taxes offered in some regions can have consequences for institutional dimensions due to reduced government coffers. Further, cultural elements can be threatened by focusing on financial goals in these contexts, through, for example, appropriating cultural knowledge, leading to social harm (Beninger & Francis, 2016). Trade-offs can be approached in a number of ways. Hahn et al. (2015) describe two overarching ways in which trade-offs, once acknowledged, can be addressed by organizations: acceptance and resolution. Acceptance refers to acknowledging and living with a recognized trade-off, while resolution refers to efforts to manage the trade-off, such as through forging a synthesis or creating a temporal or spatial separation between elements. While acceptance is often an attractive approach, given that it can require less input from organizations, resolution can provide unique opportunities for organizations while benefiting the wider community. As Spangenberg (2004) advocated, it may be possible to exploit synergies among elements in order to minimize trade-offs. That is, it can be possible to bolster several dimensions simultaneously. For example, waste streams from one product line can be used as an input for another product line, thereby potentially improving financial contribution while preserving natural resources. Further, activities can be undertaken in such a way that preserves cultural aspects, while supporting economic contribution in a local context. For example, working with local artisans or cooperatives for promotional activities can help to contribute to cultural vitality and economic contribution, while supporting the company’s wider financial bottom-line. The management of trade-offs can also be facilitated by organizations’ explicit prioritization of different elements of sustainability. More specifically, organizations have to decide which elements to attend to at various stages of their pursuit of greater sustainability, as well as over the longer term. This prioritization

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can be facilitated by organizations developing an understanding of their impact on each of the elements, engaging in regular community engagement to understand priorities and expectations (Kaptein & Wempe, 2001), and using tailored indicators that focus on the intersection of two or more elements (Spangenberg, 2004). For example, Davidson (2009) argues that organizations should not set the price as to capture the maximum surplus, which, while helping the company’s financial situation, could undermine outcomes in these contexts. As a way forward, rather than set prices based on summing costs and profits, providers can view the price that consumers can pay as the upper limit of the per unit cost of the product or service through the formula ‘Price – Profit = Cost’, which is better aligned with limited financial resources (Varadarajan, 2014). This shift in thinking can provide a way forward that encourages companies to lower costs, where costs can be taken in the broadest sense that goes beyond focusing on only financial costs, to include costs to communities and the environment. Tackling trade-offs may require a diversity of organizations working together. Working with others is often encouraged within the business literature in these contexts, and could identify solutions towards managing trade-offs. For example, other industries or organizations may have well-developed methods that minimize harm to natural resources; with cooperation, an organization could potentially leverage these solutions. Organizations can come together to share and create solutions at the trade or industry association level, or work with other organizations ad hoc, in order to tackle these oft seemingly intractable problems. Some organizations may find certain elements easier to address than others, and these strengths can be leveraged. For example, small or medium sized local organizations originating within the community likely have a deep understanding of their cultural heritage and, through their social networks, be well suited to foster participation. As such, considering formal partnerships or informal sharing between organizations can help to manage these trade-offs in impoverished contexts.

Conclusion In this chapter, we have offered evidence of how providers could pursue each of the twelve elements. Providers could use the twelve elements to scan their environment and identify new business directions and innovative structures aimed at meeting the specific challenges within impoverished contexts in the pursuit of sustainability. We note that while our focus was on impoverished contexts, our framework and selection of elements may also apply to other domains. While companies and communities could use them to set standards and assess impacts of their activities, consumers could use the twelve elements to inform their purchasing decisions, for example. Looking forward, these dimensions and their respective elements can provide a useful lens for organizations and practitioners to assess, discuss, and ideally improve

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their activities in pursuit of sustainability within impoverished contexts in emerging economies. Similarly, these identified twelve elements, their challenges and potential solutions, and the trade-offs between them will ideally help catalyse and broaden future scholarship towards our greater understanding of this important area, that of sustainability issues in impoverished communities within emerging economies. Given that research to date has primarily focused on one or two dimensions of sustainability (Kolk et al., 2014), future work could aim to rectify this through investigating the impact of sustainability considerations on organizational activities and communities in these contexts. Research could also partake in participatory action research to apply these dimensions and their elements to new or ongoing business activities, to assess their broad impact.

Note 1 While some authors distinguish between the terms sustainability and sustainable development, there is overlap between the terms and they have been treated as synonyms in some literature (Waas et al., 2011). For consistency, we use the term sustainability throughout the document.

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2 PUBLIC–PRIVATE PARTNERSHIP AS A MECHANISM TO ENCOURAGE MNES’ CONTRIBUTIONS TO SUSTAINABLE DEVELOPMENT GOALS Insights from Brazilian experience Leonardo Elizeire Bremermanni, Roman Teplov ii, Sina Mortazaviii, Juha Väätänenii, and Suraksha Guptaiii

Introduction Can sustainability disputes like the social empowerment challenges of developing nations be resolved in the next decade through the United Nations’ (UN) initiatives and programmes? International organisations (IOs) such as the World Bank (WB), International Labor Organisation (ILO), United Nations Industrial Development Organisation (UNIDO), United Nations Children’s Fund (UNICEF), and more than 30 other United Nations entities are now aiming to tackle the issue of poverty in emerging markets. However, will this work in practice? The support to such initiatives may come from companies operating on the global market. Generally, a large sum of the global market consists of disadvantaged and poor communities of people who earn less than 1 dollar per day. These markets or communities are commonly referred to as bottom of the pyramid (BOP) or base of the pyramid markets (Prahalad & Hammond, 2002; Prahalad, 2006). Recent sources define BOP communities as people who cannot afford the basic goods and services needed to easily survive (Sinha et al., 2017). BOP markets are highly important, as they may be new sources of growth for multinational enterprises (MNEs), include more than 4 billion people, and are less saturated compared to developed markets with a high demand for investment and job creation (Prahalad & Hammond, 2002; Sinha et al., 2017). At the

i INESC-Brazil, São Paulo, Brazil ii LUT University, Lappeenranta, Finland iii University of Newcastle, Newcastle, UK.

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same time, researchers account for the differences in consumer behaviour between BOP and traditional markets (see e.g. Barki & Parente, 2010). Foreign Direct Investments (FDI) by MNEs could be an efficient instrument for enhancing the social empowerment of people in BOP markets and providing inclusive growth for these regions (Prahalad & Hammond, 2002). However, MNEs often lack the motivation to enter these markets due to substantial challenges and low expected profit (Schuster & Holtbrügge, 2012). For instance, MNEs in the pharmaceutical sector in India find it challenging to find a price point that matches the BOP markets, making it difficult for their managers to generate capability building in developing countries (Roy Chaudhury et al., 2005; Gupta, 2017). To advance the social empowerment of BOP societies, the UN and related international organisations have created several frameworks to facilitate the sustainability of both businesses and BOP societies. Millennium Development Goals (MDGs) were declared by the UN in New York on 8 September 2000, which was the result of an assembly comprising 189 countries. The MDGs agreement was designed to improve the following elements: poverty and hunger, universal education, gender equality, child health, maternal health, HIV/AIDS, environmental sustainability, and global partnership (United Nations, 2000). It is argued among scholars that MDGs aimed to improve the global partnership of actors both in private and public sectors of countries, resulting in linkages that can offer growth to developing nations (Gupta, 2017). Undoubtedly, MDGs were developed with good intentions and based on admirable moral values of the UN and their partners, offering a bandwagon for disadvantaged people. However, were MDGs successful? Several studies have found that MDGs had some fairly positive effects on sustainability issues, but they were not successful by far (Held, 2005; Saith, 2006; Briant Carant, 2016; Cormier, 2016). The UN was not able to gain satisfactory results for the MDGs. This was evident in 2015 as the UN outlined a new humanitarian agenda in the form of Sustainable Development Goals (SDGs) (United Nations, 2015). SDGs extend the MDGs’ objectives and primarily focus on combating hunger, poverty, inequality, human right boundaries, gender inequality, and environmental issues (United Nations, 2015). It is crucial for UN and related entities to monitor and create a mechanism that allows all the governmental and non-governmental organisations in different nations to address the SDGs. Thus far, the UN advocates that public–private partnerships (PPPs) in the form of collaboration between governing institutions and MNEs can significantly enhance the speed of achieving SDGs (United Nations, 2015). It is argued by scholars that partnerships and networking by MNEs is an important tool for MNEs in the pharmaceutical sector in developing countries (for instance, when working with the local government) to overcome the market constraints such as regulatory challenges (Buckley & Ghauri, 2004). Therefore, the UN has called for a more robust partnership between

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MNEs and the governments of developing countries to increase social empowerment in BOP communities (UNDP, 2017). However, in spite of the topic’s importance and noticeable interest within academia, there is still a gap in the International Business (IB) literature regarding the role of partnerships in implementing strategies to address SDGs by empowering BOP markets (Cormier, 2016; Parnell, 2016). It is previously documented in some IB research that collaboration between MNEs and public institutions can improve social empowerment in developing countries (Scherr et al., 2003; Fisher, 2004; Belcher, 2005) However, these studies have also demonstrated contradictory findings. For instance, Fiaschi et al. (2015) argue that in India, the government is not able to address social issues such as social empowerment in the most efficient way. This may be the result of misaligned objectives between the MNEs and policy makers. Some also argue that although MNEs in the BOP markets are gaining business grounds, they have not had a large impact on the social empowerment of the local population (Karnani, 2007; Schwittay et al., 2011; Schuster & Holtbrügge, 2012). Therefore, in order to be regarded successful, the model should not only bring economic benefits for MNEs but provide real improvement of well-being for the BOP population. The energy sector is an illustrative example, since electrification in remote rural areas has been long recognised as an instrument for improving living conditions and empowering poor societies (Sovacool, 2012; Gómez & Silveira, 2015; Slough et al., 2015). However, high infrastructure investments and low profit margins due to the population’s low density in rural areas discourage profit-seeking MNEs from operating in such markets (Ruiz et al., 2007; Pereira et al., 2011; Xu et al., 2016). In light of the above complexities, it is evident that a research gap exists related to how MNEs and governmental institutions of the host country can work together to address the BOP market’s social empowerment challenges, as well as what existing challenges and solutions could improve the quality of life for the BOP markets. In this regard, there is a lack of studies to offer guidelines for managers and policy makers in designing and implementing mechanisms to work toward SDGs that benefit people in BOP markets. Moreover, as argued above, many of the studies have focused on BOP markets in India whereas we aim to focus on the Brazilian BOP market and understand how the energy sector influences poverty issues in that country. The Brazilian electrification programme was a large project involving both public actors as well as private businesses and MNEs and has had a large impact on poor population well-being improvement. Thus, to address the identified problem, we propose the following research question:How can public–private partnerships in the energy sector facilitate poverty alleviation? This paper consists of the following sections. In the next section, a literature review will discuss previous studies and reveal problems existing in the current understanding of the issues studied. Next, in the method section, the research will be justified, followed by the case of the Brazilian energy sector. Finally, the study will be finalised through a conclusion and discussion, followed by a proposed research model for future studies.

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Literature review Poverty alleviation has been part of the UN’s and IOs’ sustainable development programmes for over 40 years, and initiatives such SDGs and MDGs are perfect examples of this effort (Shackleton et al., 2008; United Nations, 2015). The UN has stated that the social class of society that does not earn enough income to provide the necessities of daily living is considered part of the poor class of society (United Nations, 2000). Consequently, poverty alleviation can be seen as the result of multiple improvements in various areas such as enabling access to energy, improving sanitation, and capabilities building (United Nations, 2015). MNEs are considered to have become more influential on a global scale as they hold valuable resources that can help bring prosperity to many developing nations (Lall et al., 1983; Wells, 1983; Cuervo-Cazurra & Genc, 2008). It is observed from the literature that investments by MNEs in emerging markets have led to poverty reduction, which can be a cause of better linkages, outsourcing the locals, tax generation, and planning by MNEs and governing bodies (Firth & Ghauri, 2010). MNEs are attracted to targeting BOP as it is considered an eye-catching market (Prahalad & Hammond, 2002; Karnani, 2007; Pitta et al., 2008). However, some industry segments such as the energy sector are more challenging and less attractive for international firms’ investments. The International Energy Agency highlights that emerging markets in developing nations need modern energy services, as more than 1.2 billion people have no access to power (IEA, 2016). They also argue that MNEs are mostly interested in investing in densely populated regions, since rural areas are not considered fruitful for business due to a less dense population and significant challenges such as poor infrastructure requiring additional investments. At the same time, while organisations such as the WB, UN, Global Environment Facility (GEF) share enormous concerns for rural electrification, the results of their activities do not have the desired impact (Wamukonya, 2007; Rahman & Ahmad, 2013). Yet, the same sources consider host country governments’ alliances with the private sector a key element for rural electrification. This is due to the fact that public institutions (i.e. government) in developing countries encourage MNEs to invest in the energy sector by offering attractive incentives and subsidies so MNEs will engage the locals in business (Haaland & Wooton, 1999; Radulovic, 2005; Srinivasan, 2005; Purohit, 2007). Partnerships can have benefits in several forms for private (such as MNEs) and public sectors (such as governmental bodies). Previous studies have concluded that MNEs can improve host countries’ technological infrastructure and help the local companies have more business opportunities (Fan et al., 2000; Rangan et al., 2006). Foreign direct investment by MNEs has direct (e.g., new jobs creation, infrastructure development, and other forms of investment in the host country’s economy) and in-direct (also known as the spillover effect) influences on the host country’s economy (Borensztein et al., 1998). The positive effects of

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direct investment by MNEs are often seen in eliminating technological gaps and reducing unemployment rates of the host country (Findlay, 1978; Wang, 1990). However, this may result in loss of important knowledge and resources by the firm to local companies in the host country, which is considered a spillover effect (Borensztein et al., 1998). Research has shown that partnership between governmental institutions and private companies in emerging markets such as India (in the construction industry) and several African countries (in the mining sector) was one of the preferred routes for prosperity for both the people and the MNEs of these regions (Dansereau, 2005; Patil & Laishram, 2016; Papadopoulos et al., 2017). However, the same sources maintain that the trust issues existing between the MNEs and the policy makers of India and African countries are also evident and challenging for the operational activities of MNEs as they limit sustainable business in these regions. So, how can MNEs and the public sector gain sustainable achievements and trust to foster business opportunities as well as social empowerment in developing countries? Even though sustainability achievements may depend on several factors in the host country (e.g., innovation, policy environment, and the firms’ international experience and business models), PPP is the most important influencer (Bansal, 2005; Clark, 2007; Boons & Lüdeke-Freund, 2013). The literature has documented PPP from diverse angles. Some common synonyms of the term partnership are contracting-out, nongovernmental–governmental alliance, linkages, and community–local government cooperation (Krishna, 2003; Johnston & Romzek, 2005; Rangan et al., 2006). The public sector may be governmental bodies, whereas the private sector could be MNEs or other non-governmental firms (Rangan et al., 2006; Chen & Johnson, 2015). According to Bovaird (2004), a PPP is carried out when there is a working plan between a public-sector organisation and any organisation other than public sector bodies. PPP is also defined by Klijn and Teisman (2003) as a mode of cooperation between public institutions and other institutions that form a linkage between each other. The same source confirms these linkages can also be described as changing arrays of social relationships between inter-reliant actors that can influence political, economic, and social problems. Linkages with other local firms in the form of outsourcing are key elements for MNEs when establishing businesses in emerging markets (Hitt et al., 2002; Wright et al., 2005; Haanyika, 2006; Yiu et al., 2007). It is apparent from previous studies that PPP can play a vital role in addressing sustainability and social issues such as poverty alleviation (Dansereau, 2005; Bäckstrand, 2006; Brinkerhoff & Brinkerhoff, 2011). However, most research on the role of PPP is still in the form of conceptual studies and significantly less empirical research has been conducted (Wettenhall, 2003; Hood et al., 2007; Brinkerhoff & Brinkerhoff, 2011). Moreover, confusion emerges as some researchers argue that public and private sector relationships may not yield the intended public benefits (Edwards et al., 2004; Clark, 2007).

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In this regard, it can be observed that empirical research such as case studies in the context of PPPs and their influence on social issues can extend the literature of international business as it helps scholars examine these notions. In particular, analysis of the Brazilian electrification programme Light for All (LfA) may bring new insights on implementing PPPs in achieving SDGs. Indeed, Brazil possesses vast energy resources generated mainly by large hydro-power plants (IEA, 2013). However, a significant portion of distant rural communities in Brazil lacks access to electricity. A challenging environment, lack of infrastructure, and low population density make simple grid extensions economically problematic and distract private companies from operating in such markets. To tackle the energy problems, the Brazilian government launched several electrification programmes. Whereas earlier programmes suffered from a misalignment of stakeholder objectives, poor performance, and failure to meet stated aims, later initiatives received a more positive evaluation (cf. Ruiz et al., 2007; Winkler et al., 2011). The important feature of the LfA programme is the creation and development of local businesses to improve local population wellbeing. Private electrical companies (e.g., distribution companies) in Brazil are obliged to construct an electrical network infrastructure to make electricity access possible in remote areas. The partnership between business and public players is, therefore, an important mechanism implemented by the government.

Data and method To address the research objectives and account for the scarcity of empirical studies related to the topic, we applied a multimethod approach. Given the exploratory nature of the research, primary data was collected in the form of in-depth interviews (cf. Patton, 1989; Eisenhardt & Graebner, 2007; Denzin & Lincoln, 2008). To ensure the quality of the research, we applied a data triangulation approach (see e.g., Eisenhardt, 1989) and complemented the findings arising from interviews with a descriptive statistical analysis of the secondary data. The study concerns the case of the LfA electrification programme. Its first stage was implemented by the Brazilian government from 2003 to 2008. The second stage occurred from 2009 to 2016, and the third stage is currently active. The programme’s objectives are to provide electricity for people living in remote rural areas and promote simultaneously renewable energy solutions instead of a traditional fossil fuel-based system for autonomous energy generation. During the programme execution, its objectives and rules have been constantly adjusted in order to increase coverage of the poorest part of the Brazilian population (i.e. BOP). The semi-structured interviews were conducted by two authors in 2016 as part of a large international project, “A Framework Model on MNE’s Impact on Global Development Challenges” (MNEmerge), conducted under the European Union’s Seventh Framework Programme for research, technological development, and demonstration. The overall number of in-depth interviews is five, including two with policy makers and three with industry representatives. The

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questionnaire was initially developed in English and then translated into Portuguese by native speakers. The interviews were conducted in Portuguese and then transcribed and translated into English. Due to the relatively small number of interviews available, we did not go through the formal qualitative coding procedure. However, careful analysis and investigator triangulation (i.e. the interviews were independently analysed by two researchers and the findings were then discussed with the team) have been applied. Secondary data was provided by the Ministry of Mines and Energy of Brazil. The data was collected by MDA PESQUISA, which interviewed 3,105 beneficiaries of the LfA electrification programme between the months of July and September of 2013.

The case of Brazil The Brazilian energy sector is completely regulated by the Brazilian Electricity Regulatory Agency (ANEEL). It is responsible for developing and applying rules and laws concerning both local firms and MNEs. After becoming established in Brazilian territory, MNEs must comply with current tax, environmental, labour, and health laws, as well as social norms. However, to attract MNEs, the government provides incentives at both federal and regional levels. In general, these incentives are offered in the form of tax reduction or access to finances such as, e.g. funding for renewable energy projects implementation. The typical form of operation is concessions, where a company is granted the right to operate in a specific area. By providing such incentives, the government expects to encourage multinational companies to operate in otherwise economically unattractive regions. Furthermore, companies are expected to contribute to regional economic and social development. The important requirement is that they operate in poor regions. Before being granted the right to serve profitable urban areas, companies must establish businesses in rural areas where the expected profit is lower. There are several reasons why private companies enter developing markets. For instance, these companies might be interested in local technical expertise. However, more often the primary reason is economic efficiency. This is the main reason why MNEs are concentrated in the southeast and southern regions of Brazil, where the human development index (HDI) is higher than in the northern and northeast regions. Since certain cases of rural network expansion do not have significant economic benefits for companies, governmental regulation and subsidies are offered to stimulate companies to provide electricity to both rural and urban areas. To encourage firms, the government has applied subsidies to make a company’s costs equal in rural and urban areas. As a principle, higher costs are not transferred to the consumer. To achieve economic efficiency, MNEs outsource certain activities (e.g., maintenance, construction of transmission lines) to local firms and provide necessary training. This practice also corresponds to the government’s intention

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to stimulate the formation of linkages between MNEs and local businesses. Nevertheless, some negative effects were also recognised from the PPP between the MNEs and the Brazilian government. According to the interviews with local policy makers, when policy makers have formed partnerships with MNEs and supported their operations, they expected more positive outcomes for the region. Some policy makers note that the level of collaboration between MNEs and local stakeholders is inadequate. However, in some other regions, the government seems to be satisfied with the existing level of collaboration. This mainly depends on the level of capability and knowledge possessed by local companies and is often not enough to satisfy the requirements of multinationals. Therefore, quality control schemes were developed to measure the skills of the local workforce. In some cases, the MNEs are satisfied with the level of quality provided by local suppliers, but in other situations, they must contract with established international players as there are no adequate local firms as alternatives. Strict quality requirements and increased competition create additional pressure on local firms. However, as it was noted by one of the respondents, the demands from MNEs may also stimulate entrepreneurship and lead to the emergence of new local firms. A direct effect in the form of job creation is the main benefit often cited by the respondents. Additionally, the presence of foreign firms may lead to improvements in infrastructure and the introduction of new, more sustainable business practices. Attitudes toward spillover effects differ between business representatives. While some admit the positive impact of technology diffusion, others do not explicitly mention it. Also, policy makers are not fully satisfied with the diffusion of innovations from MNEs to local firms. As a result, a combination of various effects can be achieved when PPP works well, contributing positively to the local economy. However, it is interesting that the government expects MNEs to have a larger impact than a regular company. This may have led to certain disappointments in the actual results in Brazil. Although the impact of MNEs’ presence may be considered insufficient, there is possibly a positive feedback loop. This would occur when job creation leads to an increase in the population’s wealth, which in turn leads to a growing demand for products and services and then to further job creation. The improved wealth of a region increases tax revenues which enable greater investments in healthcare, education, and other public services. An MNE representative also noted positive social impacts generated by the company. The LfA programme’s socioeconomic impact was evaluated from secondary data through the following aspects, which are consistent with MDGs/SDGs: increased family income, gender equality, local improvements in health and education access, avoiding a rural exodus, increased purchases of electric appliances (providing comfort and saving time that can be used in other profitable activities), and changes in women’s activities. The analysis reveals the relationships between various MDGs and SDGs and demonstrates how electrification can contribute to poverty alleviation.

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Regarding poverty alleviation concerns and family income, it was noted that the minimum wage increased after the LFA programme was implemented (Figure 2.1). For instance, in 2013, there was an increase in the number of families with income greater than minimum wage level, which is about 41% of the families. Around 64.2% of the interviewed households experienced an increase in their children’s school activities. Similarly, electrification together with governmental support led to creation of new healthcare centres primarily focused on providing prenatal care and paediatric assistance. Increased number of healthcare centres resulted in increased availability of medical services for the population which was reported by 40.6% of the interviewed. The programme also affected migration into rural areas. In the regions covered by the programme, about 96,000 families arrived to live in the rural area because of newly available electricity access in 2009. The number increased to 155,000 families in 2013. In the increased purchases of electrical appliances stimulated by the programme, the most useful home appliance acquired was the refrigerator, followed by the laundry tub and the washing machine. Among the beneficiaries, 57.4% said that by saving time on housekeeping tasks, women started to engage more in other activities such as helping their husband and children complete their chores. Additionally, through entrepreneurial activities developed by some of the women, such as crafts and sewing, many families increased their income. This programme revealed the difficult task of achieving universal electricity access. To be a successful programme, parallel actions should be taken, such as 60.40% 55.60%

41.0% 36.60%

2.10% UP TO 1 MINIMUM WAGE

FROM 1 TO 3 MINIMUM WAGE

2.40%

ABOVE 3 MINIMUM WAGES 2009

0.90% 0.30% HAS NO INCOME

0.10% 0.70% DO NOT KNOW/DID NOT ANSWER.

2013

FIGURE 2.1 Average monthly family income (public data from Light for All Department/Ministry of Mines and Energy (MME), 2013)

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education and entrepreneurship support for beneficiaries. It is also important to achieve a certain level of success. This could be more easily reached by considering the PPP strategy and involving MNEs, local companies, and the government. Overall, it can be concluded that, although the third stage of the programme has not yet been completed, results achieved during previous stages demonstrate the significant impact electrification can have on poverty alleviation and improvements in the population’s overall well-being.

Discussion and conclusion The analysis of the Brazilian electrification programme reveals the interplay between governmental initiatives aiming to address a sustainable development agenda and improve the population’s living conditions and business objectives perceived by MNEs as well as local players. It also highlights interconnections between different SDGs and demonstrates how efforts towards achieving one goal can contribute to realising other goals. Indeed, as it was also demonstrated in previous works (cf. Haanyika, 2006; Birol, 2011; Azimoh et al., 2017), merely relying on self-regulating business mechanisms is not sufficient for energy provision to remote communities. Thus, even large electricity providers may be discouraged by significant costs associated with grid extension and low profitability in comparison to urban areas with a higher population density. Profitoriented companies try to avoid excessive costs associated with infrastructure development and local workforce training. The main positive effect of FDI is often seen in job creation (cf. Fan et al., 2000; Yang, 2003; Rosca et al., 2016). This was also noted to a certain extent by interviewees from both the business sector and policy makers. However, the danger of the crowding out effect should also be taken into account. Furthermore, the lack of capabilities among local businesses plays a negative role. From one viewpoint, MNEs are eager to outsource some activities (e.g., grid construction and maintenance) to local subcontractors, but from another, the level of quality local firms can provide often does not meet the MNEs’ requirements and forces them to contract another, often multinational, service provider. This not only limits the possibility for technological and knowledge spinoffs but also directly decreases the number of new workplaces generated and leads to an even greater crowding out effect in the local market. From the case of the LfA programme, we can conclude that electrification programmes’ success depends on a balance between incentives attracting FDI and regulatory norms ensuring the programme’s objectives are addressed. The formation of PPPs demonstrated the ability to mitigate the above-described problems if not avoid them completely. Therefore, the role of public policy makers lies not in merely attracting FDI, but in creating incentives for MNEs to operate in less profitable areas such as remote rural communities. In particular, the Brazilian government offered subsidies to bring the operating costs in rural

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areas down to figures comparable with urban areas and thereby avoid transferring excessive costs to consumers. When attracting MNEs, governments also encourage the formation of linkages between MNEs and domestic firms. The linkages can facilitate technology and knowledge transfers and facilitate the development of innovative domestic firms. However, as previously noted, a current lack of capabilities, and consequently low absorptive capacity, decreases technology diffusion. In this regard, PPP can be considered a way to combine the efforts of business and public players to improve the level of local capabilities and reach the point at which the collaboration between MNEs and local business can be mutually beneficial. The analysis of secondary data contributes to the works of Chaurey et al. (2004) and Kooijman-van Dijk and Clancy (2010) by identifying positive linkages between electrification and poverty reduction. Furthermore, addressing remote rural communities contributes to improving the condition of the BOP population. The Brazilian case demonstrates that electrification leads to improved living conditions and creates new business opportunities which in turn develop new markets for multinational firms. Eventually, the self-reinforcing positive feedback loop between population wealth and business opportunities for MNEs can be triggered. Therefore, in respect to the proposed research question, PPP can be viewed as an important element in facilitating the provision of clean energy (SDG 7) and consequently contribute to poverty reduction (SDG 1). The interconnections between public and business players can be systematised as seen in Figure 2.2. According to the presented framework, PPP can contribute to other well established but often ineffective mechanisms such as direct aid or corporate social

Public institutions and policy makers ¥ Incentives ¥ Subsidies ¥ Regulations

Public-Private Partnership (PPP) ¥ Technology ¥ Investments ¥ Local linkages

Multinational Enterprises (MNEs) FIGURE 2.2

Framework

SDG7: Affordable and Clean Energy

SDG1: No poverty

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responsibility (CSR). In this respect, PPP should be viewed not as an alternative but as a complementary tool that enables governments to better combine regulations and incentives and encourage MNEs to contribute toward sustainable development agenda objectives. The study contributes to the academic literature by highlighting the role of PPP in government efforts to achieve sustainable development agenda objectives. In particular, the study provides insights from a real case to this mainly conceptual discussion. The framework proposed can be applied in the empirical analysis of the impact of PPP in comparison with alternative mechanisms to achieve SDGs. The interconnections between SDGs, although intuitively appealing, so far have not received sufficient attention in the academic literature. Therefore, with this paper, we also aim to bring this issue into broad academic discussion. The study identifies several implications for practitioners and specifically for policy makers. Attracting FDI is often achieved through economic instruments such as improved access to finances and tax rebates. However, regulations should require MNEs to also invest in less profitable projects such as the electrification of remote rural areas. PPP can be considered a mechanism for establishing a balance between incentives and regulations. Regarding the capability-building aspects of PPP, governments should stimulate capability-building activities by both stimulating MNEs’ investment in local training and supporting local entrepreneurship initiatives, resulting in the emergence of new firms. Governments need to create incentives for a skilled workforce to remain in rural areas. Clear environmental regulations and incentives for adopting renewable energy-based solutions are essential. The optimal mix of various energy sources can be estimated with respect to each region’s objectives. However, such offgrid systems need to be designed while considering technical sustainability, meaning further extension should be allowed as demand grows to avoid future investment costs. The study also has several limitations arising from its explorative nature. A single case design limits the findings’ generalisability, and therefore, the derived implications should be carefully reconsidered when expanding to other sectors. Furthermore, although the study focuses on emerging markets, the case country context should be considered. Indeed, Brazil has vast water resources and a well-developed energy generation industry relying mainly on hydropower, which may not be the case for other developing countries. Finally, although the proposed framework is based both on practical findings and an extensive literature study, it has not been tested by a large-scale quantitative study. Nevertheless, we tend to view these limitations not as deficiencies of the current work but rather as prospective avenues for further studies. We believe the issues discussed in this work will trigger additional research and eventually produce a solid understanding of the potential of PPP in achieving the UN’s sustainable development agenda objectives.

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Acknowledgement The data leading to this chapter was collected during project “A Framework Model on MNE’s Impact on Global Development Challenges” (MNEmerge) which received funding from the European Union's Seventh Framework Programme for research, technological development and demonstration (Grant Agreement No. 612889).

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3 MNES’ SUSTAINABILITY CHALLENGES AND CORPORATE SOCIAL RESPONSIBILITY IN EMERGING MARKETS The case of Amway Won-Yong Ohi, Rami Jungii, Young Kyun Changiii, and Yeojin Kimiv

Introduction There has been increasing attention to corporate social responsibility (CSR) as a key strategic agenda. In particular, CSR is critical for multinational enterprises (MNEs) because it can be an effective tool to gain legitimacy in foreign environments (Oh, Choi, Chang, and Jeon, 2019). Cultural, administrative, geographic, and economic (CAGE) distances exist in these foreign environments (e.g. Ghemawat, 2001), thus MNEs face “liability of foreignness” (LOF), namely, social and economic costs borne by foreign firms operating in foreign countries (Zaheer, 1995). LOF is one of the main sources of discriminatory hazards for MNEs (Eden and Miller, 2004). We argue that CSR can play an important role in helping firms gain legitimacy (Jamali, 2010; Oh, Chang, and Martynov, 2011) in order to overcome LOF in emerging markets, particularly those undergoing significant institutional change (e.g., Peng, 2003) or where there are “institutional voids” (e.g., Khanna and Palepu, 2010). Since legitimacy is a socially constructed concept, CSR may enhance a business’s legitimacy in the eyes of local stakeholders, thus contributing to its competitive differentiation (Bolton, Kim, and O’Gorman, 2011; Rathert, 2016). In particular, Chang and colleagues (2012: p. 486)

i ii iii iv

Lee Business School, University of Nevada, Las Vegas Sogang Business School, Sogang University Sogang Business School, Sogang University Kenan-Flagler Business School, University of North Carolina at Chapel Hill

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noted that “firms’ active [social] participation can be explained by their pursuit of legitimacy”. In this chapter, we conduct a case study of Amway, a U.S. company that specializes in multi-level marketing (MLM) to sell health, home care, and beauty products. When Amway entered foreign countries, especially emerging countries such as India and China, it actively engaged in CSR to build legitimacy and gain support from local stakeholders. We believe our study contributes to theory and practice in the literatures on both CSR and international business. From a theoretical viewpoint, our study shows the benefits of CSR engagement in gaining legitimacy from local stakeholders in foreign countries. While most previous work on CSR (e.g., Orlitzky, Schmidt, and Rynes, 2003) has acknowledged the economic benefits of CSR engagement, our understanding of the benefits in “multinational” contexts has been limited. In this regard, this chapter extends the theoretical boundary to how CSR engagement yields better organizational outcomes in a global environment, specifically emerging markets. From a practical standpoint, this study offers a more precise explanation of why MNEs should be strategic in their CSR engagement, as it is one of the important mechanisms for overcoming LOF.

Theoretical background In this section, we elaborate on two theoretically important phenomena: CSR and LOF, especially in emerging market contexts. Also, we discuss issues related to overcoming LOF in emerging markets.

CSR in emerging markets CSR can be defined as a firm’s integrated responsibilities and actions encompassing the economic, legal, ethical, and discretionary expectations of society (Carroll, 1979). Recently, CSR has become a worldwide trend and an important strategic agenda (e.g., Carroll, 2004). Also, CSR engagement has been considered an essential factor in contributing to a firm’s sustainability (Epstein, 2008). However, engagement in CSR is a challenging task for MNEs, especially in emerging markets. In particular, Crilly and colleagues (2016) noted that there is “no guarantee that efforts to be socially responsible will improve multinational corporations’ relations with overseas stakeholders.” When implementing CSR initiatives, MNEs encounter substantial difficulties because of the vagueness often inherent in making socially responsible decisions (i.e., defining what is socially desirable in foreign markets), the complexities of MNEs’ global operations, and differences between stakeholder expectations in the home and host countries (Jamali, 2010). Due to such challenges, MNEs may be cautious in their CSR engagement in foreign markets (e.g., conducting cost–benefit analysis). We argue that, in spite of the challenges of CSR engagement in emerging markets, it may be necessary for MNEs to enhance their legitimacy among local

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stakeholders and to gain competitive differentiation over local competitors (Bolton, Kim, and O’Gorman, 2011; Rathert, 2016). CSR engagement enables MNEs to build a positive social image, which, in the long term, will help them gain local and governmental support for their foreign operations (Carroll, 2004). Advocates for MNEs’ CSR engagement in foreign markets rely on the instrumental view that a firm’s social engagement should aim to achieve better financial outcomes (e.g., Vogel, 2007).

Liability of foreignness (LOF) When MNEs enter a new environment, they face significant challenges stemming from internal and external stimulants that are culturally different from those that exist in the home country, leading to a liability of foreignness (LOF). LOF refers to “all additional costs a firm operating in a market overseas incurs that a local firm would not incur” (Zaheer, 1995: p. 343). Eden and Miller (2001) specified two different types of hazards that such MNEs face: (1) unfamiliarity hazards (i.e., lack of knowledge of the host country) and (2) discrimination hazards (i.e., discriminatory treatment of MNEs relative to local firms). Also, there is an information asymmetry between the local firm and foreign firm that may not be resolved by simply exchanging information (Calhoun, 2002). According to Majocchi and Zucchella (2003), LOF is present at the outset of any international expansion. Fundamentally, LOF stems from “a company’s unfamiliarity with and lack of roots in a local environment” (Zaheer, 1995: p. 343). In other words, MNEs experience LOF because they do not have trusting relationships with multiple stakeholders in the host country. As such, LOF is caused by a firm’s lack of knowledge and understanding of the local stakeholders’ various interests in the host countries. However, in order to operate successfully over the long term, firms need to make decisions that are aligned with the interests of these various stakeholders (Freeman, 1984). Previous studies addressed ways of overcoming LOF (e.g., Barnard, 2010; Zaheer, 1995). Mostly, these studies focused on the roles of firm-specific capabilities of limiting or overcoming LOF (Barnard, 2010). However, little attention has been paid to LOF from the stakeholder management perspective – that is, how to improve relationships with local stakeholders through CSR engagement. In some cases, MNEs may not be welcomed by local stakeholders due to cultural, administrative, geographic, and economic (CAGE) differences between the firm’s home and host countries (e.g. Ghemawat, 2001). Such distances may be relieved by building favorable relationships with key stakeholders; for example, MNEs can reduce administrative distances by better managing their relationships with the host country government or they can reduce cultural distance by developing a deeper understanding of local consumers. It is therefore imperative for MNEs to develop relationships

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with external stakeholders such as suppliers, distributors, and customers in the host country (Calhoun, 2002).

Overcoming LOF in emerging markets It has been argued that, theoretically, there are two different approaches to overcoming LOF (Zaheer, 1995): (1) using firm-specific advantages (e.g., proprietary knowledge, trademarks) in foreign countries, or (2) imitating other local firms’ decisions (i.e. isomorphism). Prior studies (Delios and Henisz, 2000; Zaheer and Mosakowski, 1997) argued that, as MNEs gain more host-country-specific experience, LOF diminishes. Furthermore, scholars identified a number of factors that may reduce LOF, such as organizational learning (Petersen and Pedersen, 2002), firm-specific advantages (Nachum, 2003), and mode of entry (Eden and Miller, 2001). However, the process of overcoming LOF may be different for emerging markets than it is for developed countries, especially in the realm of the unique characteristics of the relationships with stakeholders. For example, the influence of the host government is more salient in many emerging countries (Gaur, Kumar, and Sarathy, 2011). Governments in emerging countries often support domestic firms through protectionist policies. Also, consumers in emerging markets may have a negative view of the MNEs operating in their countries (e.g., anti-Americanism against U.S. firms).

Method In this chapter, we conduct an in-depth case study. We used the case of Amway, a U.S.-based direct-selling company, to illustrate how a company utilizes CSR engagement to improve the ability to overcome LOF.

Company overview Amway, an abbreviation for “American Way,” uses a multi-level marketing (MLM) business model, a specific form of direct selling. In 1959, the company was founded by Jay Van Andel and Richard DeVos in Ada, Michigan (Oh and Park, 2014). As of 2013, Amway was ranked by Forbes as number 28 among the largest private firms in the U.S., with revenue of $11.3 billion and 21,000 employees. Amway is one of the largest MLM companies in the world, offering various consumer products (i.e., nutrition, beauty, home, and bath & body products) and business opportunities to independent distributors. Its business model is based on the person-to-person sales method, in which individual distributors act as a sales channel for the end customers, and its products are not available at regular retail stores (Oh and Park, 2014).

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Sample Amway is a global company operating in more than 100 countries and territories around the world. According to a Detroit Free Press report (UPI, 2004), Asia, a region that accounts for nearly 70% of the company’s sales, is considered a particularly important market for Amway. Among Asian countries, India, China, Thailand, and Malaysia (see Table 3.1) were among Amway’s top 10 markets in 2016 (Amway, 2017). Amway believes that these countries have great growth potential and it actively engages in a variety of CSR activities as a way to overcome the difficulties they may face in doing business in those cultures. Amway subsidiaries in these four countries were selected as samples. The information on the company’s profile and CSR activities were collected through the company’s website, annual reports, global citizenship reports, and related media articles.

Empirical context: challenges in emerging markets There has been confusion over what distinguishes a legitimate MLM business model from illegal pyramid schemes. This confusion has created controversy in a few emerging economies such as India and China (Oh and Park, 2014). In 2006, Indian government officials claimed that the company committed an “endless chain” scheme. In 2013, there was another controversy, which led to the arrest of company executives for financial fraud. Similarly, Amway was also involved in a controversy in China after beginning its operations there in 1995. The Chinese government was concerned about the increasing number of scandals related to pyramid schemes. It found that the distinction between Amway’s business model and “illegal pyramid schemes” was not clear and therefore imposed a ban on all direct-sales companies in 1998 (Levin, 2009).

Key findings Global CSR initiatives: One by One program® Amway has a vision of “Helping People Live Better Lives.” The company initiated the “One by One” program as a key corporate social responsibility (CSR) strategy in 2003. The program was designed to improve the lives of children and communities around the word. In China, for instance, the program provided children in rural areas with nutrition-monitoring programs. The core idea of this program was that “people around the world identified the most important local issues, and Amway then addressed the issue one person at a time and one child at a time” (Oh and Park, 2014: p. 6). By involving itself in such important social issues, Amway gained legitimacy and improved its reputation in local communities.

(Not disclosed) Around 17 billion baht in 2014

5,000 employees Around $2.7 billion in 2016

800 full-time employees and 2,000 indirect employees

Around Rs 247 crore in 2013

Number of employees

Revenue

$2.70 billion

(Not disclosed)

1987. 05 Bangkok

$35.46 billion

1995. 04 Guangzhou • 2 regional offices in Beijing and Shanghai; 237 retail shops • Manufacturing plant in Guangzhou • Botanical Research Center in Wuxi

Amway Thailand

$1.19 billion

1998. 05 New Delhi • Over 142 offices • 4 regional mother warehouses and 55 city warehouses • Manufacturing plant in Nilakottai

Amway China

Market size(direct selling’s billion dollar markets in 2015)

Regional branches

Market Launch Location of headquarters

Amway India

TABLE 3.1 Sample descriptions

MYR 1.09 billion in 2016

467 employees

$4.44 billion

1976. 03 Petaling Jaya • 3 regional warehouse hubs • 25 Amway shops throughout Malaysia and Brunei

Amway Malaysia

CSR Activities

•

•

•

•

•

• •

•

•

•

Musical education programs were provided for children in 15 rural towns 101 children attended special family camps 55 workshop and camps were conducted to build children’s confidence

•

25 mobile libraries delivered books to schools in isolated areas 90,000 audio books distributed for the blind More than 1,000 Thai children were sponsored for free reconstructive surgery

•

25 libraries were established for disadvantaged students 754 Nutrition Kitchens were built in rural areas 400,000 children from migrant worker families were helped 105 Rainbow Activity Rooms were built

•

•

12 computer centers were established, benefitting 1,000 students every year Training academy was established in Madurai for the disabled Community radio station was built for education of the disabled and disadvantaged individuals Sri Radha Banke Bihari Hospital was supported to provide quality healthcare services

Amway Malaysia

Amway Thailand

Amway China

Amway India

TABLE 3.2 Amway’s CSR engagement in emerging countries

Awards

•

•

•

•

2004–2005 Appreciation Awards, World Blind Union (WBU), Central Red Cross Bank and National Child Protection Agency Asia’s Best CSR Practices Award, 2012, CMO Asia Global CSR Excellence & Leadership Award, World CSR Congress Pt. Madan Mohan Malaviya Award for Best CSR Practices in Education, for Project Sunrise •

•

•

•

•

• China Charity Award by the Ministry of Civil Affairs Included in the Forbes list of top 25 charity foundations in China, 2013 Ranked 4th in transparency, by Ministry of Civil Affairs Platinum Award, Trusted Brand in China; Gold Award in Asia (Nutrilite™) 2006–2000, Reader’s Digest 2004–2008 Most Influential Multinational Companies, China Business Group China Charity Award, Ministry of Civil Affairs •

•

•

• Corporate Social Responsibility Excellence Recognition, American Chamber of Commerce in Thailand 2006–2009 Outstanding Establishment for Achievement on Labor Relations/ Welfare, Department of Labor Protection/Welfare, Ministry of Labor Clear & Accurate Product Label Award, Office of the Consumer Protection Board Consumer Protection Label Award, Office of the Consumer Protection Board •

•

•

2005–2009 Super Brands Awards, Reader’s Digest 2006, 2007, 2009 Branding Excellence in Direct Selling Category The Brand Laureate Best Managed Company and Best Corporate Governance – 2004, Finance Asia 2000 Top 10 Overall Best Managed Company, Asiamoney Magazine

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CSR engagement in emerging markets Amway India Amway India is a wholly owned subsidiary of Amway and Amway was one of the first global direct selling companies to enter the Indian market in 1995. Since starting commercial operations in May 1998, Amway India has succeeded in the Indian market through various localization strategies. This success, however, was not achieved without difficulties due to the constant controversy over the legitimacy of the direct selling industry. Often, direct selling companies like Amway were mistaken for fraudulent pyramid schemes, and in 2013, the CEO of Amway India, William S. Pinckney, was arrested for violating the Prize Chits and Money Circulation Schemes (Banning) Act. These controversies and lawsuits, which stemmed from the absence of required regulatory clarification, could be fatally damaging to a company’s reputation and hinder the growth of direct selling companies. In fact, Amway India’s net profit declined 20% in 2013–2014, even as the market was growing. In an effort to improve its corporate image and build close relationships with key stakeholders, Amway India has engaged in a variety of CSR activities. In addition, the Indian government issued a revised corporate law (the Companies Act 2013), which encompassed CSR policy and established rules for categories of CSR activities, and required companies operating in this market to undertake CSR initiatives. In accordance with Section 135 of the Companies Act 2013, which refers to CSR, Amway India has participated in comprehensive CSR activities, including supporting the welfare of the visually impaired and supporting underprivileged children with education and better health and hygiene. Under the project, called Sunrise, Amway India, in partnership with NGOs, supported less privileged children in 14 cities. They promoted education by supporting five government schools in New Delhi and setting up education, training, and research institutions to support education and training for women and other underprivileged sections of Indian society. Children in the cities of Hubli, Salem, and Bhubaneswar were given the opportunity to receive computer training. To improve healthcare and hygiene, the company supported a charitable hospital in Vrindavan to provide high-quality healthcare services to less privileged communities. Amway India also has been working for visually impaired children through the National Project for Visually Impaired. They have supported 16 computer centers across the country, with the objective of equipping visually impaired students with computer education to improve their prospects for employment, and provided Braille textbooks to 85,000 visually impaired children. In recognition of these commitments to social responsibility, CSR Times awarded Amway India a Global CSR Excellence & Leadership Award for its initiatives in the field of education in 2013 and a Pt. Madan Mohan Malaviya Award for Best CSR Practices in Education, for Project Sunrise in 2014–2015.

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Amway India has become one of the top 10 direct selling companies in India with a huge amount of revenue of $9.5 billion in 2015.

Amway China Amway China was formally established in 1995 after three years of investment in the construction of a manufacturing plant. Amway China earned over $178 million in sales in the three years after it entered the Chinese market and is expected to continue to grow. However, in 1998, the Chinese government banned all direct marketing, Amway’s core business model, claiming that direct selling operations can function as a base for criminal activity such as pyramid scams (Oh and Park, 2014). After being banned, Amway China’s sales declined sharply, and its 1998 revenue was $36 million, one fifth of the previous year’s revenue. As a response, Amway decided to revise its business model and tried to build amicable relationships to develop an image as an honorable corporate citizen by working closely with Chinese governments, while also building brand awareness and reputation through various CSR activities (Esen, 2013). As part of this effort, Amway China has sponsored over 3,100 social projects in the areas of children, education, health, and environmental protection, with a total contribution valued at nearly RMB 190 million. By 2011, 64 concerts had been held with a total audience of about 69,000 and donations of more than RMB 700 million. Furthermore, Amway China established the Amway Charity Foundation, which is the first non-public foundation of an MNE that is under the direct supervision of the Ministry of Civil Affairs in China. The Foundation was officially registered upon receiving approval in 2011 and has devoted significant resources to various charitable activities. It launched several projects for children in rural areas. One successful case is the Spring Sprouts Kitchens program. Many Chinese parents living in rural areas feel they need to move to cities to find stable work, leaving their children behind with grandparents or other relatives. Because of the distance between their homes and schools, many children live at school for a week or more instead of returning home. Due to the lack of facilities at the school, these children often have difficulties getting enough nutrition. Under the guidance of a poverty alleviation strategy, the Amway Charity Foundation, in partnership with the Chinese government, organized the Spring Sprouts project to build kitchens for such schools so that they can provide nutritious meals to migrant school children. Furthermore, through the Sunshine Project and the Rainbow Project, Amway China was committed to providing a better living and educational environment for migrant children through philanthropic activities such as donating libraries and providing volunteer classes to supplement the core school curriculum. These activities resulted in Amway China winning approximately 1,800 honors and awards for its CSR performance by the end of 2010. The company won the award of Exemplary Benefactor to Social Welfare by the China Charity

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Association. In 2004, Amway China was on the list of Fortune magazine’s (Chinese Edition) China’s Most Admired Companies, and on the China Business News Network’s List of Top 10 Most Influential MNEs and Most Influential Brand. Other rewards included the China Charity Award by the Ministry of Civil Affairs, Most Responsible Enterprise by China News Weekly and Red Cross Society of China, the China Charity Outstanding Contribution by the China Charity Federation, and the Charity China Corporate Responsibility Award by the China National Committee for the Care of Children. Sales in China kept growing, from $36 million in 1998 to $2.57 billion in 2016, and now, China is Amway’s biggest market, where around one third of its annual sales are generated.

Amway Thailand In 2002, Amway Thailand established the Amway for Thai Society Foundation (ATF) in partnership with Amway Business Owners. Since its establishment, the ATF has conducted various social activities to support underprivileged children and young people and to promote culture and the public interest. According to the Amway Global Citizenship report in 2011, since 2005, Amway Thailand has built school libraries for children in remote areas of the country and has awarded scholarships to students to support their studies. In addition, the Foundation promoted a project to support disabled children and donated 500,000 Thai baht (THB) to rebuild a language lab that was damaged by the 2004 Tsunami. In cooperation with One Voice Brightens the World, Amway Thailand distributors recorded 42 audio books for blind children. Amway Thailand has devoted much attention and effort to preserving ancient ruins and to restoring the country’s invaluable national cultural heritage. For instance, Amway supported the preservation of ancient houses with architectural and historical value in Siamese society, and in collaboration with the Thailand Business Council for Sustainable Development, it also supported conservation of the Ayudhaya project. As a result of its various socially responsible activities, Amway Thailand obtained a certification of Guidance on Social Responsibility from the Ministry of Industry, and won awards such as Most Admired Company and Trusted Brand in Direct Selling Business.

Amway Malaysia In 1986, to support the Malaysian Social Welfare Department’s policy on children without parents, Amway pledged 555,000 Malaysian Ringgit (MYR) to build the first Rumah Tunas Harapan, a place for orphaned and abandoned children to live with foster parents. Starting with this, Amway Malaysia has expanded its programming by building another eight Rumah Tunas Harapan homes, which their employees and distributors have visited regularly and supported financially. In

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2014, Amway Malaysia launched a new Program Harapan project (the Hope program) with two subprograms, Saturday Shows and Project HeadSTART, for underprivileged children, and did so in collaboration with the Ministry of Women, Family and Community Development. Saturday Shows is a monthly program that invites celebrities to share their knowledge and skills with the children. HeadSTART was launched in 2015 to help children in foster homes transition to working life. This project gives 18-year-olds who are “aging out” of foster homes the opportunity to work for the Amway Malaysia headquarters for a sixmonth apprenticeship, during which the apprentices can gain work experience by rotating among various departments, seek guidance from mentors who are Amway Malaysia employees, and take advantage of English language classes provided. In addition, Amway Malaysia has organized, with the assistance of a team of clinical and developmental psychologists, more than 55 Happy Healthy Minds workshops and camps to encourage positive behavior and build confidence among children and to share ideas with parents on how to help children harness their potential. The Happy Healthy Wards Project, which is an extension of Happy Healthy Minds, has supported government hospitals and children’s day care centers at 11 government hospitals to provide a better environment for children receiving treatment. Amway’s’ consistent commitment to local communities, which for nearly 40 years has focused on children’s rights, has likely become the foundation for building trust with consumers and has served as a steady engine of growth. Beginning with five employees in 1976, Amway Malaysia has become one of the largest network marketing companies in the country. Since 2005, it has earned its place on the list of Most Trusted Brands, and the company’s sales revenue has increased from MYR 422 million in 2003 to MYR 1,087.5 million.

Discussion As MNEs have expanded their business scope worldwide, they have been increasingly concerned with understanding how to adapt in foreign countries. Many international business scholars have argued that MNEs face unavoidable costs associated with their “foreignness,” which is conceptualized as a liability of foreignness (LOF). These liabilities could arise from a number of sources, including costs of coordination problems, unfamiliarity with the local culture and local market, a lack of information networks or political influence in the host country, a lack of ability to attract ethnocentric buyers, and so on (Zaheer and Mosakowski, 1997). While previous studies have focused on the ways in which MNEs attempt to reduce their LOF in business markets (e.g., Barnard, 2010; Zaheer, 1995), there has been comparatively little attention paid to how MNEs lower their LOF in nonmarket arenas. In fact, MNEs develop distinctive competitive advantages by using non-market strategies, such as proactive stakeholder management. Non-market

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strategies are a coordinated pattern of a firm’s actions in the non-market environment (i.e., social, political, and legal areas) to produce value through enhancing its overall performance (Hillman, Keim, and Schuler, 2004). Firms implementing non-market strategies are significantly concerned about their relationships with governments, policy makers, non-profit organizations, etc. Such groups are defined as “stakeholders” in a CSR context. That is why CSR has been classified as a core non-market strategy (Baron and Diermeier, 2007). As such, recent research has begun to pay increasing attention to CSR in various institutional contexts (e.g., Chang, Oh, Park, and Jang, 2017), particularly in emerging markets. The in-depth case study of Amway shows that CSR could be a viable option for MNEs to reduce their LOF. Amway tried to reduce its LOF through CSR in several ways. First, it proactively took on some civic responsibilities that might otherwise be taken on by host country governments. Every government is responsible for improving the quality of citizens’ wellbeing and bears the primary burden of maximizing the public good. However, governments in emerging countries may not always feel they can afford to take care of every aspect of public welfare due to resource constraints, budgetary shortfalls, and under-developed infrastructure. For instance, in 2015 the central government of India spent 433 billion Indian rupees ($6.7 billion USD) on social security and welfare for a population of 1.2 billion, compared to the U.S. government’s $882 billion USD for a population of approximately 326 million, which indicates that every American citizen received benefits valued at $2,940, whereas every Indian citizen received benefits from its government valued at just $5 dollars. This resonates with the recent legislative movement by which the Indian government promulgated a strong set of new CSR initiatives requiring qualified corporations to spend 2% of their net profits on social development (Prasad, 2014). Our analysis shows that when Amway enters foreign countries, it actively engages in socially responsible initiatives (both universal and/or locally specific) that help to share the public welfare burden for which governments are typically responsible. As a result of these initiatives, Amway has received government awards in many emerging countries. For example, Amway China has received the China Charity Award by the Ministry of Civil Affairs of the People’s Republic of China, was included on the Forbes list of top 25 charity foundations in China in 2013, and was ranked fourth in transparency by the Ministry of Civil Affairs of the People’s Republic of China. Such country-wide recognition has allowed Amway to establish a favorable relationship with key stakeholders (e.g., host country governments, customers, and local communities), thereby reducing the costs of outsidership. Second, Amway engages in CSR to build its image as a way to reduce its LOF in emerging countries. While MNEs have increasingly shaped everyday life as they weave worldwide webs of production, consumption, and even culture, their rising dominance also generated a perception of them across the globe as “takers” (rather than givers). For example, the world’s ten biggest MNEs, which include Wal-Mart, Apple, and Shell, have a combined revenue of $2.9 trillion,

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which is larger than China’s tax revenue. Specifically, Wal-Mart ranks as the tenth-largest MNE, with a revenue of over $482 billion, which is larger than the combined tax revenue of Spain, Australia, and the Netherlands (Rodionova, 2016). At the same time, many MNEs have been accused of devastating exploitation of human and natural resources as well as large-scale tax avoidance (e.g., Schwarz, 2009). As such, MNEs often instill a fear of exploitation among people in emerging countries. However, such concerns about legitimacy could be more fatal to the MNEs that face controversies in their business operations. For this reason, Amway has implemented significant corporate giving programs as a way to reduce LOF when it enters emerging countries, with the following results: Amway employees and distributors have helped more than 11 million children by volunteering a combined 3.1 million hours to raise $225 million for thousands of projects worldwide; Amway Thailand teamed up with others to provide 22,000 items of clothing for children; and Amway China stepped up to donate $800,000 through the Amway Charity foundation. Finally, Amway engages in CSR as a way to lower its LOF by building strong rapport – and ultimately, trust – with stakeholders in emerging countries. Stakeholder interactions, as a key part of CSR activities, help MNEs develop the ability to manage relationships with these stakeholders. In this regard, Barnett (2007) introduces the notion of stakeholder influence capacity (SIC), defined as “the ability of a firm to identify, act on, and profit from opportunities to improve stakeholder relationships through CSR” (p. 803). In a similar vein, other studies also emphasize a firm’s capabilities for stakeholder relationship management. For example, Sharma and Vredenburg (1998) argue that stakeholder integration capability (i.e., the ability to establish trust-based collaborative relationships with a wide variety of stakeholders) is one of the key organizational capabilities. As shown in our analysis, Amway has tried to improve its relationships with stakeholders in host countries through proactive corporate philanthropy and community involvement programs. Specifically, due to the unique characteristics of its business model (i.e. direct selling), the confusion over the differences between MLM and pyramid schemes was one of the main sources of controversy in emerging markets. In a Harvard Business Review article, Amway’s cofounder, Richard DeVos, describing how Amway adapted in China, said “trusting relationships would allow us to move quickly to adapt to changes” (DeVos, 2013). Developing trusting relationships with stakeholders is one of the important factors enabling Amway’s successful establishment in China. It should be noted that doing business in China is characterized by guanxi (Xin and Pearce, 1996), which generally refers to relationships or “connections,” and affects every level of Chinese society. In China, thus, it is beyond doubt that building trust with stakeholders is key to success for MNEs. Amway’s CSR seems to fulfill this promising goal.

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FIGURE 3.1

CSR as overcoming LOF mechanism in emerging market context

Conclusions One of the important findings here is that the LOF each MNE faces is not the same in all the locations they decide to invest. Prior studies (e.g., Gaur, Kumar, and Sarathy, 2011; Zaheer, 1995) argued that MNEs with different firm-specific resources and international experiences face different magnitudes of LOF across countries. However, we argue that MNEs with proactive stakeholder management through CSR engagement further alter their LOF. Investment in CSR is important for MNEs to gain local stakeholders’ support and legitimacy in emerging markets. Therefore, it is “crucial for [MNE’s] corporate leaders to promote their firm’s social performance” (Oh, Cha, and Chang, 2017: p. 122). The underlying idea is that the analysis of cases such as Amway, presented here, enriches our knowledge of how CSR helps MNEs eventually overcome LOF.

References Amway. 2017. Amway reports 2016 sales of $8.8 billion USD, 20 December 2017. Retrieved from www.amwayglobal.com/amway-reports-2016-sales-8-8-billion-usd/. Barnard, H. 2010. Overcoming the liability of foreignness without strong firm capabilities: The value of market-based resources. Journal of International Management, 16(2), pp. 165–176. Barnett, M. L. 2007. Stakeholder influence capacity and the variability of financial returns to corporate social responsibility. Academy of Management Review, 32, pp. 794–816. Baron, D. P. and Diermeier, D. 2007. Strategic activism and nonmarket strategy. Journal of Economics & Management Strategy, 16(3), pp. 599–634. Bolton, S. C., Kim, R. C. H., and O’Gorman, K. D. 2011. Corporate social responsibility as a dynamic internal organizational process: A case study. Journal of Business Ethics, 101(1), pp. 61–74. Calhoun, M. A. 2002. Unpacking liability of foreignness: Identifying culturally driven external and internal sources of liability for the foreign subsidiary. Journal of International Management, 8(3), pp. 301–321. Carroll, A. B. 1979. A three-dimensional conceptual model of corporate performance. Academy of Management Review, 4(4), pp. 497–505.

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4 THE BELT AND ROAD INITIATIVE Infrastructure and sustainable development Neil Renwicki

Introduction According to the MERICS BRI database, there are already over 1,000 BRIrelated projects world-wide with a total project value of over US$25 million (Eder, 2018). But is the “Belt and Road Initiative” (BRI) helping or hindering international sustainable development and achievement of the Sustainable Development Agenda 2030 and Sustainable Development Goals (SDGs)? The BRI has evolved as a “global strategy” (Brînză, 2018). The stated aim of the BRI is to promote the connectivity of Asian, European and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road, set up all-dimensional, multi-tiered and composite connectivity networks, and realise diversified, independent, balanced and sustainable development in these countries . (Government of China, 2015) The Initiative’s intended strengthening of closer intra- and inter-regional connectivities, grounded in new transport, energy and communications infrastructure investment, is designed to grow production, employment and trade. Early analyses have pointed to a mixed bag of opportunities and risks associated with involvement in the Initiative (Baker McKenzie, 2017) This chapter focuses on the extent to which the BRI contributes to achieving the Agenda 2030 and SDGs agreed in 2015. The possibility that the BRI can contribute significantly to implementing the 2030 Agenda has also attracted attention

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as the challenges of achieving the SDGs by 2030 are becoming more evident. The 2030 Sustainable Development Agenda is, in its own words, “a comprehensive, far-reaching and people-centred set of universal and transformative Goals and targets”. As Table 4.1 indicates, the Agenda established 17 Sustainable Development Goals and 169 targets and the 193 states signing-up to the agreement made the, by now, oft-referred to pledge “that no one will be left behind” (United Nations, 2015). The agreement entered into effect on 1 January 2016. However, the Sustainable Development Goals Report 2018 concluded that progress to ensure that no one is left behind has not been rapid enough to meet the targets of the 2030 Agenda. Indeed, the rate of global progress is not keeping pace with the ambitions of the Agenda, necessitating immediate and accelerated action by countries and stakeholders at all levels . (United Nations, 2018: 1) Further concerns have been raised. For example, the 2018 SDG Index and Dashboards Report argues that “most G20 countries have started SDGs implementation, but important gaps remain”; “No country is on track to achieve all the goals by 2030”; “Conflicts are leading to reversals in SDG progress”; “Progress towards sustainable consumption and production patterns is too slow”; and “High-income countries generate negative SDG spillover effects” (SDSN Secretariat and Bertelsmann Stiftung, 2018: 1). The BRI, as an up-and-running

TABLE 4.1 The SDG Goals

GOAL 1: No Poverty GOAL 2: Zero Hunger GOAL 3: Good Health and Well-being GOAL 4: Quality Education GOAL 5: Gender Equality GOAL 6: Clean Water and Sanitation GOAL 7: Affordable and Clean Energy GOAL 8: Decent Work and Economic Growth GOAL 9: Industry, Innovation and Infrastructure GOAL 10: Reduced Inequality GOAL 11: Sustainable Cities and Communities GOAL 12: Responsible Consumption and Production GOAL 13: Climate Action GOAL 14: Life Below Water GOAL 15: Life on Land GOAL 16: Peace, justice and strong institutions GOAL 17: Partnerships for the goals

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programme of immense magnitude and ambition, supported by an established institutional secretariat, backed by China as the world’s second-largest economy, and with an existing reach across all continents is viewed widely as an important potential instrument to help the global SDG effort. Nevertheless, as the BRI is steadily rolled-out and projects become operational, there is mounting concern over whether the benefits actually realised will be “win–win” for China’s partners as the spectrum of potential risks incurred in the implementation of the BRI range from adverse environmental impact, high investment exposure to political, social and cultural impacts. The chapter is structured around three sections: Introduction; The BRI in Practice – Promoting Sustainable Development?; Conclusions. This chapter argues that the BRI’s infrastructure investment approach is helping to foster sustainable development through the building of transport, communications and energy facilities along the routes and corridors. Clearly, these are much needed in a number of lowincome economies that have signed-up to the BRI. However, the evidence of the BRI’s project work so far shows that there are major problems that need to be dealt with if this venture is going to meet the aspirations and aims of the 2030 Agenda and SDGs. The raft of problems include an increased indebtedness of partner states arising from BRI projects, a lack of transparency in the contract processes and a disproportionate share of such contracts awarded to Chinese firms, and environmental protection dangers. Underlying an emerging international scepticism, opposition and so-called “pushback” against the BRI are well-known political tensions over BRI Corridors but related to wider geo-political and geo-strategic problems, perhaps most widely noted in India’s opposition to the China–Pakistan Economic Corridor (CPEC) as it passes through the contested territory referred to by the Indian Government as “Pakistan Occupied Kashmir”. Further international reluctance to embrace fully the BRI stems from the perception that the BRI is less about a fresh approach to promoting sustainable development and growth grounded in principles of equity and “win–win” mutuality, but rather more about the BRI as a “zero-sum” instrument to meet Chinese national interests and resource needs and as a primary tool of Chinese economic, political and strategic power projection.

The BRI in practice – promoting sustainable development? The BRI as an instrument for sustainable development What is it that the BRI is bringing to the table of global sustainable development and is it distinctive? The initial debate surrounding OBOR/BRI was over China’s intent, the central question being how far this was a grand geoeconomic, geo-political and geo-strategic gambit by China to further its own national interest and global position? This remains an evident strand in the current literature on the BRI, so much so that President Xi Jinping has publicly sought to dismiss such concerns:

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The Belt and Road Initiative is not a Chinese plot, as some people internationally have said. It is neither the post-World War Two Marshall Plan, nor is it a Chinese conspiracy. If you had to [call it something], it’s an “overt plot”. As explained elsewhere in this volume, the OBOR/BRI has grown from a proposal made by Chinese President Xi Jinping in 2013 and its formal launch in 2015 into a global project that currently consists of 65 countries from across the world. The BRI is structured around a number of intersecting trade and investment corridors. The BRI’s aim is to act as a prime driver for investment in land and sea-based connectivity from China to regional and global markets. The raison d’être for the BRI lies in the conception of infrastructure capacitybuilding interventions designed to provide the essential platforms upon which new and stronger trade can be developed, offering the prospect for increased local production and employment opportunities and substantial revenues for the national exchequers as well as reducing national debt and steadily re-balancing their balance of payments. Certain sectors are emphasised, particularly energy, transport and communications. There are five priority aims set out for the BRI: (1) policy co-ordination; (2) better transport, energy and information infrastructure; (3) the reduction of trade and investment barriers; (4) financial integration; and (5) the promotion of connections among people (“people-to-people relations”). The BRI also aims to strengthen environmental and energy cooperation. Total trade between China and BRI countries in 2014–2016 was more than US$3 trillion; China’s own investment in these countries surpassed US$50 billion and Chinese companies had established 56 economic cooperation zones in over 20 countries, generating some US$1.1 billion of tax revenue and 180,000 jobs for them (China Daily, 2017, parag. 12). However, the BRI is controversial, with question marks on its ambitions and operational performance. The emerging issue here is whether the BRI has the ability to deliver on its potential, and how the traditional donor community should engage with the BRI. The BRI is being described as a new driver for sustainable development because it focuses on critical infrastructure investment and capacity-building that will increase connectivity and trade. The world faces an infrastructure investment gap. The estimated annual global infrastructure investment demand is about US$3.7 trillion – of which only around US$2.7 trillion is currently met (World Economic Forum and Boston Consultancy Group, 2014). A McKinsey Global Institute Report finds that, globally, there is a need to invest an average of US$3.3 trillion annually in economic infrastructure in order to support currently expected rates of growth through to 2030. Emerging economies are projected to account for some 60% of that need. The McKinsey study concluded that if the current pace of underinvestment continues, world infrastructure will fall short by roughly 11%, or US$350 billion a year. The size of the gap triples if the additional investment required to meet the UN’s SDGs is factored in (Woetzel, Garemo, Mischke, Hjerpe and Palter, 2016).

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In this context, the BRI is being held up by international organisational officials as a practical instrument for delivering the 2030 Agenda and SDGs. Liu Zhenmin, UN Under-Secretary-General for Economic and Social Affairs, speaking in June 2018, stated that the BRI and the 2030 Agenda for Sustainable Development have similar vision and principles. He argued that the BRI’s prioritisation of building connectivity in policy, facilities, trade, finance and among peoples is “extensively and intrinsically linked with the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda … such connectivity can effectively advance achievement of the goals of the 2030 Agenda” (China Daily, 2017, April 13). This shift in priority is attributable to the increased role and importance of “emerging economies”, many acting as “new donors”. Their approaches to development differ in key aspects of principle, policy, process and practice from the long-established system centred upon the OECD-DAC. Most prominent among these is China. Now the second-largest economy in the world with a global economic, political and steadily-emerging regional strategic reach, China has a growing role and influence as a provider of international development assistance and source of both state and private enterprise infrastructural investment in low-income economies. Infrastructure capacity-building therefore lies at the core of this “activist view”. The Asian Development Bank estimates the annual infrastructure investment needs across the BRI countries to be at least US$1.7 trillion until 2030 (He, 2017, parag. 12). in response to this critical gap, China has undertaken major investment. According to the MERICS BRI database, China’s investment in BRI-related infrastructure projects totals US$25 billion (this excludes projects still under construction or in the planning phase, which involve much larger investment volumes) (Eder, 2018, parag. 2). Initially capitalised at US$40 billion, the Fund is to expand to US$100 billion. Underlining this Chinese financial commitment to financial support for the BRI, in 2015 the China Development Bank stated that it had reserved US$890 billion for more than 900 projects (He and Kuijs, 2017). In addition, the Asian Infrastructure Investment Bank (AIIA) membership has grown from 57 founding members to a global membership of 87 members from all continents, with its projects leveraging a total of over US$30 billion in public and private investment. The AIIB has approved investment for projects worth over US$5.3 billion. Moreover, the BRICS grouping (Brazil, Russia, India, China and South Africa), a product of the aftermath of the 2008–2009 global financial crisis, has established the New Development Bank. This is another fresh multilateral development bank (MDB), seeded with US$50 billion in capital and formed with the intention to increase capital to US$100 billion. The BRI economies are increasingly important components of China’s trade and investment. For the first quarter of 2018, BRI countries accounted for 29.1% of China’s total exports in January–March, up from 27.9% in October–

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December 2017. Imports from BRI economies accounted for 25.8% of the total in January–March, rising from 25.4% in the fourth quarter of 2017. In this period, two-way trade between China and the 65 countries officially under the BRI grew by 19.4% year-on-year to US$287.3 billion, rising from 13.8% expansion in the fourth quarter of 2017. Exports rose by 16.5% to US$158 billion, with imports up by 23.2% to US$128.4 billion over the same period. China’s trade surplus with BRI countries fell to US$30.4 billion in January–March, from $49.9 billion in the previous quarter. The BRI economies also took a sizeable share of China’s overseas direct investment (ODI) flows. Non-financial ODI flows to BRI countries fell to US$3.6 billion in the first quarter of 2018, from US$4.8 billion in October–December 2017, but, nonetheless, this still accounted for 14.2% of total ODI flows – the highest proportion since the first quarter of 2017 (Economist Intelligence Unit, 2018a). According to the Economist Intelligence Unit’s BRI Quarterly Report, whilst the BRI member economies currently total 65 countries (although the BRI website identifies 71 members at early November 2018), in practice, China’s trade and investment links are concentrated in relatively few of these. Ten countries accounted for 66.4% and 73.3% of China’s export and import flows to BRI countries, respectively, in the first quarter of 2018, led by Vietnam, Malaysia, Russia, Indonesia and Thailand. Most of China’s ODI flows to the BRI also went to a select number, principally Singapore, Malaysia, Indonesia and Vietnam. The BRI Report concludes that “this suggests that Chinese companies engaging with the BRI are seeking out the more developed, and stable, markets included in the initiative” (Economist Intelligence Unit, 2018a, §2, parag. 1). Much of the BRI literature identifies and overcomes problems in the basic mechanics of the BRI. However, these do not take us deep enough into the heart of the problem of the BRI in terms of the BRI facilitating sustainable development. The fundamental problem is the need for transparent and effective safeguarding regulations and practices for BRI projects, i.e. a demonstrable synchronisation of BRI practices with established international norms, rules and regulations and particularly alignment with environmental and social governance (ESG). In this context, Safeguard policies are “essential tools to prevent and mitigate undue harm to people and their environment in the development process” (Food and Agriculture Organisation, 2018, para. 1). Safeguards are central to processes of identifying and designing a project. The application of safeguards enables the assessment of potential environmental and social risks and the impacts (positive or negative) associated with a development intervention. Once a project is in the implementation stage, safeguards help define measures and processes to effectively manage risks and enhance positive impacts. The application of safeguard policies provides an important opportunity for stakeholder engagement, enhancing the quality of project proposals and increasing ownership. A number of international organisations, including the World Bank, OECD and European Union, have expressed apprehension that major BRI infrastructure projects present significant environmental, social and corruption risks. For example,

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a Blog commentary hosted by the World Bank argues that such risks include biodiversity loss, environmental degradation, or elite capture and argues that such risks may be especially significant in countries involved in the BRI, which tend to have relatively weak governance. These risks will need to be identified and safeguards put in place to minimise their potential negative effects. The WBG and other Multilateral Development Banks could play a role in supporting the implementation of high environment, social and governance standards for BRI investments (Ruta, 2018, Risks section, para. 2).

BRI in action – infrastructural environmental-friendly projects There are a number of examples of BRI projects to which the Chinese Government points to substantiate its argument that it is fully committed to and actively engaged with a “Green BRI”. These include the funding, building and running of new transport links such as new single gauge railways (SGR), as well as renewable energy projects for wind and solar “clean” energy and new eco-industry parks. China has established itself as one of the leading global providers of renewable energy capacity (Gu, Renwick, and Xue, 2018). This has helped to make renewable energy a key component of China’s “Green BRI”. The Chinese engagement with renewables under the BRI is as wide as the BRI membership. A few examples are indicative of the scale of this. In Ethiopia, The Chinese-built Adama Wind Farm is the largest in SubSahara. According to PowerChina, “with a total number of 136 sets installed and a total installed capacity of 204,000kW, it is the first overseas wind farm with Chinese Standard and Technology adopted” (PowerChina, 2018: 1). The China–Pakistan Economic Corridor (CPEC) of the BRI has seen significant development of wind energy. The UEP Wind Farm is one of five Wind Farms developed under CPEC. With an installed capacity of 99 MW it is the largest wind power project developed under CPEC. The strengthening of the renewable energy sector under the BRI is not restricted to wind power. For example, projects developed under the auspices of CPEC illustrate the importance played by solar and hydropower. The Quaid-e-Azam Solar Park in Pakistan is one of the largest solar power plants globally, whilst the Suki Kinari Hydropower Project due completion in 2021 is located on the Kunhar river in the Kaghan valley of Pakistan (Belt and Road Initiative, 2018). If one turns to consider the component of industrial parks, a key element of the BRI Corridors, the Chinese Government highlights its role in Ethiopia with the funding and construction of Africa’s largest eco-industrial park in Hawassa City, 275 kilometres southeast of Addis Ababa, opened in July 2016. The Park uses a Zero Liquid Discharge (ZLD) system that helps recycle 85% of sewerage disposal water. Describing the development to a meeting of NEEPAD, Prime Minister Hailamariam Dessalegn argued that: “The ecofriendly industrial park will show that environmental protection and

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development can go hand in hand” (Embassy of Democratic Republic of Ethiopia, 2016: 1). A third aspect of a “Green BRI”, on the ground, is that of transport infrastructure capacity-building. In Central Asia, three railroad connections had been completed under the BRI by Autumn 2018: PopAngren in Uzbekistan, Uzen-Bereket-Gorgan traversing Kazakhstan, Turkmenistan and Iran, and Khorgos dry port in Kazakhstan that connects China and Kazakhstan. A fourth, the China-Kyrgyzstan-Uzbekistan rail line remains under renewed discussion. Under CPEC, we can see the upgrading of the Karachi-Peshawar Railway Line and the creation of Pakistan’s first mass transit system, the Orange Line Metro Lahore (OLMT), the first of three rail lines of the Lahore Metro system. In Africa, the Mombasa-Nairobi SGR, opened in 2017, carries freight and passengers and is planned to be extended to Uganda, Rwanda and South Sudan. Reflecting the inter-connected character of the BRI, Chinese firms are developing the Mombasa port and Mombasa Special Economic Zone. In Ethiopia, the US$3.4 billion Addis Ababa Urban Rail project – the electrified Addis Ababa Light Rail Transit (AA-LRT) – has also been developed. The environmental credentials and contribution of these projects to Kenyan and Ethiopian sustainable development have been stressed by the Chinese Government (Embassy of the People’s Republic of China in Ethiopia, 2016, February 1; Government of China, 2017, June 1). However, in both cases, concerns have been raised within the respective countries about the mounting indebtedness being incurred and uncertainties over funding for further line extensions (Omondi, 2017, para. 5). According to current research, this concern is being more widely experienced. As Eder has noted, “excessive debt levels of many target [BRI] countries receiving Chinese loans have … sparked concerns about the BRI’s financial sustainability” (Eder, 2018, Security section, para. 3). The implications for national finances of BRI partner states of BRI-driven increased indebtedness for an economy include budgetary pressures on non-BRI development and national environmental protection projects. With respect to BRI-related rail development, evidence of “pushback” can be found in the example of the Malaysian East Coast Rail Link project, funded by China and constructed by a Chinese firm under the BRI. Although construction on the 620-kilometre link began in August 2017, under the new Prime Minister Mahathir Mohamad, work on the project was suspended in July 2018 due to deepening Malaysian Government concerns over the rising cost of this project and the amount Malaysia would have to borrow from China estimated by the incoming Government as $20 billion, thereby exceeding original estimates and others agreed with China under the previous Government. The previous Malaysian government led by Najib Razak, a strong supporter of the BRI, agreed BRI-related infrastructure projects estimated to cost US$34 billion (Pham, 2018: 1). In addition to such concerns, geo-political and geo-strategic factors have been the subject of increased discussion following the recent experience of Sri Lanka under the BRI. In 2017, the Sri Lankan government signed

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a concessionary agreement for a joint venture between the China Merchants Port Holdings Company Limited (CMPort), China’s state-owned port company and the Hambantota port, which is the second largest port in Sri Lanka. According to the agreement, 70% of the Hambantota port will be owned by the Chinese company while the Sri Lanka Ports Authority (SLPA) owns the remaining shares. The criticism of this transfer is that it resulted from an over-ambitious port/airport development that loaded Sri Lanka with an unsustainable debt to Chinese policy banks and other investors at commercial rates. This has suggested to some observers that it has led to a transfer from a development project per se, to a geo-strategically important acquisition by China (Moramudali, 2017). China has made much of its stated commitments to a “green BRI” and pledges that the BRI will adhere to global and regional environmental protection “Safeguard” régimes. Most prominently, the Chinese Government and the United Nations worked together with a range of inter-governmental and non-governmental organisations to establish an International Coalition for Green Development on the Belt and Road, announced in May 2017. In 2017, the Chinese Ministry of Environmental Protection and three other ministries issued “Guidance on Promoting Green Belt and Road” and the “Belt and Road Ecological and Environmental Cooperation Plan”. These policy documents are buttressed by the “Action Plan on Connecting the Belt and Road by Standards (2018–2020)”. Under the Action Plan, China commits itself to expanding the fields of mutual recognition of standards and work with the countries along the BRI routes to formulate no fewer than 100 international standards, translate and launch more than 1,000 foreign versions of the Chinese standards, and carry out 2,000 key technical index comparisons in important fields. (Ministry of Environmental Protection, 2017) An interesting element of China’s approach to a Green BRI are the Green Credit Guidelines (GCG), first announced in 2012 and described by Friends of the Earth as “one of the most progressive sustainable finance policies in the world” (Friends of the Earth, 2017, para. 2). With the advent of the BRI, a recent Friends of the Earth assessment concludes that: The Green Credit Guidelines offer China and its banking sector a unique opportunity to make good on their commitment to invest sustainably. But according to our report findings, Chinese banks continue to struggle to meet their obligations to comply with host country law and international norms and standards in their overseas investments (2017). The question of the BRI’s compliance, or at least synchronisation with, ESG has become particularly salient with the publication of “China’s Arctic Policy” in January, 2018. The White Paper states that “China will advance

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Arctic-related cooperation under the Belt and Road Initiative” through the creation of a Polar Silk Road: China hopes to work with all parties to build a “Polar Silk Road” through developing the Arctic shipping routes. It encourages its enterprises to participate in the infrastructure construction for these routes and conduct commercial trial voyages in accordance with the law to pave the way for their commercial and regularised operation. China attaches great importance to navigation security in the Arctic shipping routes. It has actively conducted studies on these routes and continuously strengthened hydrographic surveys with the aim to improving the navigation, security and logistical capacities in the Arctic. China abides by the International Code for Ships Operating in Polar Waters (Polar Code), and supports the International Maritime Organisation in playing an active role in formulating navigational rules for the Arctic. China calls for stronger international cooperation on infrastructure construction and operation of the Arctic routes. (Government of China, 2018, January 26) In terms of the ESG, the White Paper and proposed Polar Silk Road are carefully crafted to present the policy within the context of what President Xi Jinping has referred to as a “community of common destiny” and set in terms of international régime compliance, specifically those pertaining to environmental protection. The White Paper seeks to rationalise China’s statement as a “Near-Arctic State” and is widely viewed as a statement of intent. Some evaluations assess the statement and Polar Silk Road in geo-political and geo-strategic terms. However, there is an interesting intervention in the discussion by Artur Gushchin, visiting scholar at Fudan Development Institute and a researcher in the Arctic at Akvaplan-Niva (Norway). Gushchin focuses on the technical requirements to protect the environment should a “Northern Routees on the technical requirements to protect the environment should a t Fudan Deveposed to the Arctic environment. These include dangers from: ballast water discharges, fee charges in destination ports if ballast water be released under special procedure, instituting sensor technology “that ought to be made mandatory on all commercial carriers that intend to operate in the Arctic in order to send real-time data and hence deter violations”, the necessary scientific studies – particularly through the increased use of unmanned remote controlled water vesselsin(Gushchin, 2018). In addition, Gushchin’s insightful assessment points to the importance of laying submarine fiber-optic cables on the Arctic seabed. Arctic cables can play a decisive role in the long-term exploration of mineral deposits on the seabed, since they can become docking stations for unmanned underwater vessels, enable real-time data transmission, compile existing communication services into one system and lead to standardization of the Arctic market.

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Gushchin argues that, in particular, China should pay special attention to data-centers within the Arctic members that will accumulate all the information. Major IT companies in the world have already invested up to $1 billion to their construction in the region and are ready to double capacities within 5–10 years. (Gushchin, 2018: 1) Such detail notwithstanding, the Polar Silk Road under the BRI has steadily taken institutional form. The restructuring of the Chinese Government in 2017 saw an upgrading of the administrative infrastructure for the Polar Silk Road in the shape of the new Ministry of Natural Resources (MNR) with many of the responsibilities previously held by the State Oceanic Administration (SOA), under which China’s polar activities previously were organised, being absorbed by the new ministry. The China Institution of Navigation (CIN) has established a Polar Navigation and Equipment Committee, with a dedicated forum on polar navigation and infrastructure convened in September 2018. Given the fragility of the Arctic eco-system and indigenous peoples’ communities, the sensitivities of increased commercial, scientific and tourist traffic and ancillary activities proposed in the White Paper will require full ESG adherence, monitoring and transparency under the BRI, the Arctic Council and treaties, and wider international obligations to the 2030 Agenda and SDGs. Whether this is realised in practice remains to be seen over the course of the Polar Silk Road’s development.

Conclusion There is a broadly held consensus across the major intergovernmental organisations that the aims and focus of the BRI are aligned with the 2030 Agenda and SDGs and it represents a potentially important tool to help achieve these over the next 12 years. By placing its emphasis on building infrastructure capacity and increasing connectivity, the BRI has the potential to meet the 17 SDGs. Building new capacity that will generate new trade, production, employment and increased economic growth and GDP of the BRI partners can contribute to all the SDGs globally through interlocking national projects. Increased national governmental income can drive national policies related to SDGs such as health and well-being (SDG 3), education (SDG 4), or urban sustainability (SDG 11). Part of the attraction of the BRI for those is that it is already up and running with a worldwide partnership, backed by unprecedented levels of investment funding from China, partner Governments and MDBs, well advanced in its policy portfolio, institutionalisation and operational functionality, with a global impact. This is a central pillar of Agenda 2030 and SDG 17 “Partnership for the Goals”: “Coordinating policies to help developing countries manage their debt, as well as promoting investment for the least developed, is vital to achieve sustainable growth and

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development” (UN, 2015). Clearly, the key element for realisation of the BRI’s potential contribution is the sustainability of the development, understood holistically as embracing financial and administrative durability, Corporate Social Responsibility, environmental protection and verifiable “Green Growth” that will provide the requisite basis for helping to end poverty (SDG1) and hunger (SDG 2), reduce inequalities – including those of gender (SDGs 10 and 5), as well as provide employment with dignity (SDG 8). However, the BRI in practice is spurring concerns and criticisms. As we have noted above, there are issues over the financial viability of the BRI and the economic, financial, environmental, socio-cultural, governance, corporate and political impact on the BRI partners and the wider global development project. To realise the BRI’s full potential and genuinely help attain the SDGs, these concerns need to be addressed. For example, high debt levels of many of the BRI countries receiving Chinese loans have spurred concerns about the BRI’s financial sustainability. Responding to these issues requires a recalibration of Chinese Government policy on the BRI to meet the need for clear and effective safeguarding provisions for BRI projects, synchronised with established international norms, rules and regulations that are, themselves, integral to the ethos, aims and implementation of Agenda 2030 and achievement of the SDGs.

References Baker McKenzie. (2017, October 10). Belt & Road: Opportunity & risk: The prospects and perils of building China’s New Silk Road [Web report]. Retrieved from www. bakermckenzie.com/-/media/files/insight/publications/2017/10/belt-road/baker_mck enzie_belt_road_report_2017.pdf Belt and Road Initiative. (2018). The Belt and Road Initiative [webpage]. Retrieved from www.beltroad-initiative.com/info/epage/beltandroad/201807/20180702761874.shtml Brînză;, A. (2018, March 20). Redefining the Belt and Road Initiative: The BRI is not about physical routes in Eurasia. It is a global strategy. The Diplomat. [Web news article]. Retrieved from https://thediplomat.com/2018/03/redefining-the-belt-and-roadinitiative/ China Daily. (2017, April 13). Belt and Road Initiative provides strong support for UN 2030 goals. [Web news report]. Retrieved from www.chinadaily.com.cn/china/201704/13/content_28919095.htm China Daily (2017, May 14) Full text of President Xi Jinping's keynote speech, [Web news report]. Retrieved from www.chinadaily.com.cn/beltandroadinitiative/2017-05/14/ content_29341195_2.htm Economist Intelligence Unit. (2018a, May 21). Belt and Road Initiative quarterly: Q2 2018 [Web analysis report]. Retrieved from http://country.eiu.com/article.aspx?articleid= 626742246 Economist Intelligence Unit. (2018b, August 23). Belt and Road Initiative quarterly: Q3 2018 [Web analysis report]. Retrieved from http://country.eiu.com/article.aspx? articleid=1727064356&Country=China&topic=Politics Eder, T. S. (2018, June 7). Mapping the Belt and Road Initiative: This is where we stand. Mercator Institute for China Studies. [Web article]. Retrieved from www.merics.org/ en/bri-tracker/mapping-the-belt-and-road-initiative

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Embassy of the People’s Republic of China in Ethiopia. (2016, February 1). Vice foreign minister Zhang Ming visits Ethiopia. Retrieved from http://et.china-embassy.org/eng/ zagx/gxhg/t1341874.htm Food and Agriculture Organisation. (2018). Environmental and social safeguards. Retrieved from www.faoorg/investment-learning-platform/themes-and-tasks/environmentalsocial-safeguards/en/ Friends of the Earth. (2017, December). Investing in a green Belt and Road? Assessing the implementation of China’s green credit guidelines abroad [web report]. Retrieved from https://foe.org/resources/investing-green-belt-road-assessing-implementation-chinasgreen-credit-guidelines-abroad/ Government of China. (2015). Vision and actions on jointly building Silk Road economic belt and 21st-century Maritime Silk Road, Beijing: National Development of Reform Commission, March. Retrieved from http://en. ndrc. gov. cn/newsrelease/201503/ t20150330_,669367. Government of China. (2017, June 1). Foreign ministry spokesperson Hua Chunying’s regular press conference. Ministry of foreign affairs. [web interview transcript]. Retrieved from www.fmprc.gov.cn/mfa_eng/xwfw_665399/s2510_665401/t1467100.shtml Government of China. (2018, January 26) China’s arctic policy (Beijing: The State Council Information Office of the People’s Republic of China). Retrieved from https://eng. yidaiyilu.gov.cn/zchj/qwfb/46076.htm Government of China. (2018, June 7). Reports have been saying that the Belt and Road projects have increased the debts of countries along the routes. What’s MOFCOM’s comment? Ministry of commerce of the People’s Republic of China. [online press briefing]. Retrieved from http://english.mofcom.gov.cn/article/ pressconferencehom Green Climate Fund. (2018). Environment and social safeguards [web page]. Retrieved from www.greenclimate.fund/safeguards/environment-social Gu, J., Renwick, N., and Xue, L. (2018). The BRICS and Africa’s search for green growth, clean energy and sustainable development. Energy Policy. Vol. 120, September, pp. 675–683. www.sciencedirect.com/science/article/pii/S030142151830332X Gushchin, A. (2018, October 10) Overcoming challenges facing Polar Silk Road. China Daily. [Web news article]. Retrieved from http://europe.chinadaily.com.cn/a/201810/ 18/WS5bc7c83ea310eff303282ffa.html He, T. and Kuijs, L (2017, May 4). Initiative backs growth along Belt, Road. China Daily. [Web news article]. Retrieved fromwww.chinadaily.com.cn/cndy/2017-05/04/con tent_29194811.html He, T. (2017, June 12) One belt, one road: How will partners profit? Brink News. Brink Asia. Retrieved from www.brinknews.com/asia/one-belt-one-road-how-will-partnersprofit/ Ministry of Environmental Protection. (2017, May 8). Guidance on promoting green belt and road. Belt and Road Portal. [Web article]. Retrieved from https://eng.yidaiyilu. gov.cn/zchj/qwfb/12479.htm Moramudali, U. (2017). Sri Lanka’s debt and China’s money. The Diplomat. 16 August. Retrieved from https://thediplomat.com/2017/08/sri-lankas-debt-and-chinas-money/ Omondi, G. (2017, June 5). China downplays concerns on Kenya’s rising SGR debt. Business Daily Africa. [Web news article]. Retrieved fromwww.businessdailyafricacom/mar kets/marketnews/China-downplays-concerns-on-Kenya-rising-SGR-debt/38155343956846-14ffyc7/index.html

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Pham, S. (2018, July 5). Malaysia halts a big China-backed infrastructure project [Web news report]. CNN. Retrieved from https://money.cnn.com/2018/07/05/news/econ omy/malaysia-china-rail-project-suspended/index.html PowerChina. (2018, May 11). Adama wind farm Phase I & II Project in Ethiopia [Web news report]. Retrieved from http://en.powerchina.cn/2018-05/11/content_36184678.htm. Ruta, M. (2017, May 4). Three opportunities and three risks of the Belt and Road initiative. The trade post, World Bank. Retrieved from https://blogs.worldbank.org/trade/threeopportunities-and-three-risks-belt-and-road-initiative Ruta, M. (2018, May 4). Three opportunities and three risks of the Belt and Road Initiative. The World Bank. [Web blog]. Retrieved from https://blogs.worldbank.org/trade/threeopportunities-and-three-risks-belt-and-road-initiative SDSN Secretariat and the Bertelsmann Stiftung. (2018). SDG index and dashboards report. Global responsibilities: Implementing the goals. www.sdgindex.org/reports/2018/ United Nations. (2015). Transforming our world: The 2030 agenda for sustainable development. (New York: United Nations, A/RES/70/1) https://sustainabledevelop ment.un.org/content/documents/21252030%20Agenda%20for%20Sustainable% 20Development%20web.pdf United Nations. (2018). The Sustainable Development Goals Report 2018 (New York: United Nations Statistics Division, Statistical Services Branch) https://unstats.un.org/ sdgs/report/2018/Overview/ Woetzel, J., Garemo, N., Mischke, J., Hjerpe, M. and Palter, R. (2016, June). Bridging global infrastructure gaps. McKinsey Global Institute, McKinsey & Company. [Web report]. Retrieved from www.mckinsey.com/industries/capital-projects-and-infrastruc ture/our-insights/bridging-global-infrastructure-gaps World Economic Forum and Boston Consultancy Group (2014, April, Introduction, para, 3) Strategic infrastructure steps to operate and maintain infrastructure efficiently and effectively, [Web report]. Retrieved from www3.weforum.org/docs/WEF_IU_S trategicInfrastructureSteps_Report_2014.pdfR̥

PART II

5 A TALE OF TWO DEBT CRISES The IMF and the unsustainable development of Ghana James Silverwood and Jeremy F. Moulton

Introduction Observed patterns of development processes across time and space show that no country has ever managed to achieve sustainable development through externally driven strategies. Countries may borrow and adapt ideas, money, and human resources. For a period of time they may need tutelage, technology and technical assistance. In the end, however, truly sustainable economic growth and development can only come through self-reliant homegrown strategies. The alternative is perpetual dependency and servitude. (Okereke & Agupusi, 2015: 1)

The driving force behind the meteoric rise of sustainable development from relative political obscurity to propagation as crucial to the socio-economic advancement of emerging markets has been the United Nations (UN). To reflect increasing concern about the deleterious environmental impact that development may cause, the UN created the World Commission on Environment and Development (WCED) in the 1980s. Tasked with proposing solutions to achieving economic development without destroying the natural world, the WCED (1987: 43) defined sustainable development as ‘that [which] meets the needs of the present without compromising the ability of future generations to meet their own needs’. Initial attempts to build on this progress floundered and the concept of sustainable development was subsumed within the adoption by the UN of the Millennium Development Goals (MDGs) in 2000; a series of eight pledges, including those to eradicate poverty, achieve universal primary education and reduce child mortality, for accomplishment in 2015. The uneven progress towards meeting the MDGs led to heavy criticism (Fehling, Nelson & Venkatapuram, 2013). This opened the political space for sustainable development to take centre stage in its own right, which it did in 2015 when the UN set seventeen sustainable development goals (SDGs),

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including the ambition of ending poverty, achieving zero hunger and securing gender equality, to be completed by 2030. Focus in this chapter will be placed on Ghana and the sustainability of its development since the debt crisis of the 1980s. Ghana has been considered a ‘model’ nation on the continent of Sub-Saharan Africa by the IMF for its vigorous implementation of structural adjustment programmes (SAPs), the notable gains the country has made in economic development, and the establishment of a democratic political system (Brydon & Legge, 1996: 1; Opoku-Dapaah, 2011). Whilst other international financial institutions have interacted with Ghana over the last four decades, exclusive focus on the IMF is justified not only as a considerable bilateral donor to the country since the 1980s, but because of its role as a progenitor of an unsustainable development strategy that has preserved Ghana’s financial dependency on bilateral and multilateral aid and led the country to the precipice of another debt crisis in the twenty-first century. In order to understand how the IMF propelled Ghana along this unsustainable developmental trajectory, this chapter will draw from the literature on international political economy to resurrect the theory of dependent development created by erstwhile Brazilian President, Fernando Henrique Cardoso, and Enzo Falleto. The chapter will begin with a brief overview of the rise and fall of dependency theory and the ‘Washington Consensus’. The chapter will continue with our case study of Ghana. In conclusion, the chapter finds that the export-led growth model engendered by the IMF in Ghana to overcome debt crisis in the 1980s has rendered its development unsustainable, increasing the country’s exposure to macroeconomic instability, and causing perpetual financial dependency on external creditors as a now routine element of the nation’s debt management.

The rise and fall of dependency theory and the Washington Consensus The post-war period saw the emergence of the dependency theory of underdevelopment from the UN Economic Commission for Latin America (ECLA). Historical analysis of international trade by the ECLA contended that the prices of commodities deteriorated in comparison to industrial goods (Prebisch, 1950). Consequently, underdevelopment was a structural phenomenon resulting in peripheral countries within the global economic system becoming reliant upon the dwindling economic surplus generated from the export of commodities for the import of more technologically sophisticated capital and consumer goods from core countries. In the absence of substantial reform of the global economy to alleviate this structural imbalance in global trade, the ECLA proposed that underdeveloped countries should use the state to accumulate the necessary capital and technology to achieve development. Falling under the rubric of importsubstitution industrialisation (ISI), the ECLA advocated state protection as the means to assuage the dependence on export of key commodities through state

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protection of industry, which would replace imports with local manufacturing and secure economic diversification of national production into more technologically sophisticated goods with higher value-added. Disappointment with the results of ISI saw the emergence of a new variant of dependency theory: neo-Marxism. Critical to the understanding of dependency between the core and periphery nations of the global economic system for Marxists was the legacy of colonialism, which had instituted an economic relationship that ensured the surplus from economic activity generated by periphery countries was transferred to the core (Frank, 1967, 1969). This situation rendered perpetual underdevelopment as the only possible economic outcome for peripheral countries. Consequently, development could only be secured by one of two means; international revolution to institute a global socialism (Frank, 1984) or the implementation of autarkic economic policy to remove a dependent nation from an exploitative global economic system (Amin, 1990). A complete reversal of development priorities was proffered by the rapid rise to prominence in the global economy of neoliberalism, defined here as the extension of free and competitive markets as the means of developing, and resolving conflicts within, human society (Patömaki, 2009: 432–433). Gaining political ascendency in a number of western industrial economies as a result of systemic capitalist crises of the 1970s, crucial in the dissemination of neoliberalism among emerging markets was the IMF and SAPs, the agreement of which were made conditional upon the provision of emergency bilateral aid to donor countries in economic difficulty (Killing, 2008). The neoliberal economic policy implemented through SAPs fell into two categories designed to achieve a specific objective (Simon, 2008: 87–88). Short-term stabilisation measures were designed to arrest immediate economic problems. Policy in this category included public sector wage freezes, reduced subsidies on food, health, education and currency devaluation. Meanwhile, long-term adjustment measures were implemented to achieve structural reform of the national economy. Policy in this realm included liberalisation, privatisation of state-owned enterprises and reduction of taxation. The ostensible objective of the SAPs was to enhance the market mechanism and price signals in the allocation of resources to deliver a more efficient national economy, but reality was the utilisation of state power to forcibly insert emerging markets into the global economic system of trade and finance. SAPs were designed to open emerging markets to foreign direct investment (FDI), whilst simultaneously promoting an export-orientated growth that would not only generate foreign exchange reserves to eliminate balance of payment disequilibria, but also secure economic diversification of the production base. Gaining the moniker Washington Consensus (Williamson, 2004), integral in the transmission of neoliberal economic policy throughout the global economy was the 1980s debt crisis, which was the catalyst for a new era of market-based development for emerging markets and developing countries (Milward, 2000). As described by Willis (2005: 49–51), the origin of the debt crisis lay in the commodity boom in world trade of the 1960s and 1970s, which saw exponential gains in economic

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growth and tax revenues, particularly by oil-exporting emerging markets. Large fiscal revenues from Middle East emerging markets were deposited with banks located in Europe and North America, which were recycled in ever increasing amounts of lending to other emerging markets. However, the late 1970s saw drastic falls in commodity prices in world trade. As interest rates throughout the global financial system rose, emerging markets began to suffer capital flight as investors fled for the relative safety of domestic markets. Many emerging markets were left with little option but to approach the IMF for emergency funding. The Washington Consensus was increasingly identified as failing to live up to expectation, with adverse consequences for emerging markets and developing countries including widening income and wealth inequality (Chang & Gradel, 2004: 19–23), as well as environmental degradation (Reed, 1992). Even more damning were the allegations of a geopolitical nature, the conditional nature of the SAPs highlighted as an unacceptable invasion of the sovereignty of emerging markets to determine their own economic policy (Bracking, 1999). The IMF was accused of ‘kicking away the ladder’ from emerging markets and developing countries, the imposition of neoliberalism denying them the state-led developmental models through which industrial states in Europe and North American had reached their ascendant economic position within international capitalism (Chang, 2003). Academics were quick to point out that economic growth slowed in emerging markets after 1980 when compared with the three decades of ISI after 1950 (Chang & Gradel, 2004: Chp. 2). In response to criticism, the IMF sought to broaden the conditions attached to its provision of emergency bilateral finance to include the promotion of good governance through enhancement of the quality and efficiency of state institutions such as the civil service and judiciary. A new sensitivity to poverty can also be discerned. Rather than herald the instigation of a new economic approach to development, however, these conditions were believed to ‘support market-led development’ (Jenkins, 2008: 516) designed to promote integration with international trade and capital (Eyoh & Sandbrook, 2003: 229). The evolution of the Washington Consensus has been described as ‘pragmatic neoliberalism’ (Eyoh & Sandbrook, 2003) with the state limited to interventions in the economy, such as in education and health, considered to promote global competitiveness of the national economy (Eyoh & Sandbrook, 2003: 228–232). This was nowhere less obvious than in the replacement of SAPs with poverty reduction strategies (PRSs) that were meant to protect antipoverty government expenditure in consultation with civil society groups. In reality, consultation by the IMF with local organisations was often minimal and superficial (Simon, 2008: 90). If the socio-economic results from the Washington Consensus were becoming the source of derision they at least retained their political power until the seismic tremors of the 2008 global financial crisis provided space for the emergence of new economic ideas. In contrast, the explanatory power of dependency theory and its route map for development waned to insignificance among emerging markets and

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developing countries from the 1980s onwards. Critics of dependency theory were not only external to the theoretical prism; the motionless conceptualisation of perpetual underdevelopment in the periphery rebuffed by the concept of dependent development designed by Fernando Henrique Cardoso and Enzo Faletto (1979). Cardoso and Faletto (1979: 174) posited that a new international division of labour had arisen in the 1970s based on ‘increasing control over the economic system of nations by large multinational corporations’ that ‘permits an increase in development while maintaining and redefining the links of dependency’. Consequently, ‘the interests of foreign corporations become compatible with the internal prosperity of the dependent countries. In this sense, they help promote development’, which also ‘depends on technological, financial, organizational, and market connections that only multinational corporations can assure’ (Cardoso & Faletto, 1979: 149). Driven by the arrival of the multinational corporation (MNC) as prime executor of agency within global capitalism, the association of dependence with development combined two outcomes considered contradictory by existing dependency literature. Nevertheless, emerging markets and developing countries ‘remain[ed] dependent in a very specific form’ (Cardoso & Faletto, 1979: xxi) because the factors necessary to achieve an autonomous process of development, such as the accumulation of capital and technology, were controlled by sources of economic and political power outside of the national economy (Cardoso & Faletto, 1979: xii). Countries could thus remain within a ‘situation of dependency’ (Cardoso & Faletto, 1979: xxiii), despite the incidence of economic growth and positive advancement in other metrics of development. Development delivered on these terms was necessarily limited, and ultimately unsustainable. The economic characteristics of dependent development included domination of the national economy by foreign capital and ‘local industries … dependent on foreign technology’ (Cardoso & Faletto, 1979: 164). In turn, instead of producing more expensive intermediate and capital goods, this ensured the manufacturing base of emerging markets and developing countries remained skewed towards the extraction, processing and export of commodities or production of cheap consumer goods. A structure of production that resulted in recurring losses from international trade. The societal impact of this dependent development included such phenomena as income inequality and the social marginalisation of minority peoples.

The dependent development of Ghana, 1983–2018 Ghana has agreed to eleven IMF programs since 1983, with the economic recovery programme of that year described as one of the most extensive on the African continent in that decade (Akonor, 2006: 13). In its actioning of those agreements, the country has been noted as displaying a ‘remarkable degree of compliance with Fund conditions’ (Akonor, 2006: 89). Eight years after its 1983

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intervention, the IMF (1991: 4) published a pamphlet in which it heaped praise on Ghana for its enthusiastic implementation of its policies, which ‘resulted in a major turnaround in Ghana’s overall economic and financial performance since 1983’, including rising real per capita income, lower inflation and improvement in the balance of payments. More recently, IMF commendation for Ghana has become somewhat more muted. In 2014, the IMF (2014: 4) eulogised Ghana for its ‘strong and broadly inclusive growth over the past two decades’ secured by reforms to the business environment and democratic political system that had delivered substantial flows of FDI. By 2017, however, Ghanaian economic growth had slowed significantly from the levels achieved during the boom of 2010–2013, and the IMF (2017: 5) has since limited itself to comparison of Ghana with regional peers, where it elevated itself for its ‘political stability and relatively robust and diversified growth’. IMF intervention in Ghana has been structured around core policies of promoting exports through currency depreciation and price reform, macroeconomic restraint to limit domestic demand and restore confidence and the restoration of economic efficiency through the promotion of the market mechanism and price signals in the allocation of resources (Akonor, 2006: 86–88); these polices meant to lay the foundation for ‘external payments viability’ in global financial markets (IMF, 1991: 2). IMF intervention in Ghana was intended to produce a virtuous circle of economic development whereby an influx of FDI would lead to capital and technological accumulation that elevated and diversified production, whilst exports generated foreign exchange to stave off balance of payments disequilibrium. Instead, the developmental strategy engendered by the IMF has ensured that Ghana remains trapped in a ‘situation of dependency’ as a debtor country in the world economy; dependent on multilateral and bilateral aid to navigate the vicissitudes of the global capitalist system and boom and bust in prices of international trade. Ghana’s current ‘situation of dependency’ is predicated upon its reliance for economic growth on the extraction and export of its natural resources; a developmental trajectory established by the IMF intervention in 1983. Emphasis by the IMF on export-orientated growth as the means to generate foreign exchange reserves and correct balance of payments difficulties has ensured the flow of FDI into those countries with abundant reserves of natural resources has been directed into the extractive industries (Ayelazuno, 2014: 96). Excessive reliance on the extractive industries for economic development in Ghana is in stark difference to the predictions made by the IMF (1991: 3) at the opening of the 1990s that its policies would ‘encourage diversification of exports’. Fast forward and the IMF’s predictive capacity must be brought into question. Ghana is now classed by the IMF as a resource-intensive middle-income country (IMF, 2018a: 52), Table 5.1 showing not export diversification, but increasing specialisation in primary commodities. Ghanaian exports have benefitted from a commodity boom in world trade during the twenty-first century that produced significant improvement in terms of trade until 2012. The price

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TABLE 5.1 Ghanaian main commodity exports, 2016–2020

Years

Export ($US millions)

Cocoa Exports Gold Exports Oil Exports ($US millions) ($US millions) ($US millions)

2016 2017 (Provisional) 2018 (Projected) 2019 (Projected) 2020 (Projected)

11,137 13,752 13,889 14,560 15,722

2,572 2,711 1,984 2,079 2,183

4,919 5,786 5,443 5,301 5,498

1,345 3,019 3,904 4,137 4,590

Source: IMF (2018a: 29)

received for Ghana’s historical commodity exports of gold and cocoa, supplemented by discovery of oil, which began production in 2010, filtering through into the high economic growth rates exhibited in Table 5.3. The ossification of Ghana’s export structure in the triumvirate of gold, oil and cocoa is evidenced by their accounting for 81% of all Ghanaian exports in 2014 (Jubilee Debt Campaign, 2016: 9–10). Nor is this situation likely to alter any time soon. Recent reduction in the current account deficit is largely due to expansion of gold, oil and cocoa export volumes (IMF, 2018a: 6). Table 5.1 highlights that these commodities are projected to account for a significant amount of trade value for the rest of the decade. A cursory glance at Table 5.2 would seem to confirm significant structural transformation of the Ghanaian economy since 2010. Agriculture has seen a strong decline in its contribution to economic growth from 29% of GDP in 2010 to just 17.9% in 2017, replaced by rising contribution to GDP from industry and services. Peak beneath the veneer of this structural transformation and

TABLE 5.2 The sectoral composition of Ghanaian economic growth since 2010

Distribution of GDP – Agriculture Year (%)

Value Added – Agriculture (% of GDP)

Distribution of GDP – Industry (%)

Value Added – Industry (% of GDP)

Value Added – Value Distribution Services Added – Manufacturing of GDP – (% of (% of GDP) Services (%) GDP)

2010 2011 2012 2013 2014 2015 2016 2017

28 23.7 22.1 21.7 20.6 19.1 17.7 17.0

19.3 25.6 28.4 28.2 26.8 25.2 24.3 25.6

18.0 23.9 27.1 26.9 25.4 23.6 22.7 23.7

6.4 6.4 5.7 5.1 4.7 4.5 4.3 4.2

29 24.6 22.2 22 21 19.7 18.4 17.9

51.7 49.8 49.4 49.9 52.3 55.1 57.3 56.6

Source: GSS (2018c: Appendix 1); World Bank (2018a, 2018b, 2018c, 2018d, 2018e)1

48.2 45.8 47.6 48.1 49.6 51.2 53.5 52.2

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the unsustainability of its development becomes clear, however – Ghana’s reliance on the extraction and export of natural resources driving the large swings in the growth rates evident in Table 5.3. A commodity boom in world trade, and the start of oil production, led to economic boom from 2010 to 2013. When that boom ended, it brought with it a deterioration in Ghana’s terms of trade (IMF, 2018b: 117), and as the price of Ghana’s commodities exports diminished from 2014 onwards, so did its rate of Ghanaian economic growth. The IMF (2017: 5) calculated the growth for 2016 lower than Table 5.3 at 3.5%, 1990 having been the last year the Ghanaian growth rate was so low. Instability in economic growth is endemic of Ghana’s lack of resilience within the global economic system, born of commodity dependence that leaves it vulnerable to fluctuations in international trade (Mawuko-Yevugah, 2016: 71). Unfortunately, the intensification of Ghana’s reliance on its natural resources seems set to increase in the short term. The Ghanaian Statistical Service (GSS, 2018a: 16) recorded the growth rate of the mining and quarrying sector in 2016–2017 at 30.8%, this compares with the paltry expansion of manufacturing by 9.5%. These figures pale into significance once we consider oil and gas, which is calculated to have grown by 80.3% in 2016–2017 (GSS, 2018a: 16) and 95.9% in 2017–2018 (IMF, 2018a: 23). Mining and quarrying, alongside oil and gas, provide a significant proportion of the sectoral contribution made by industry to economic growth as delineated in Table 5.3 (GSS, 2018b: 5). Declining economic growth is not the only macroeconomic vulnerability to emerge as the commodity boom ended. Table 5.4 demonstrates the pernicious impact the end of the commodity boom wrought on Ghanaian public debt, the

TABLE 5.3 Ghanaian economic growth, 2004–2019

Year/s

Real GDP Growth (%)

Real Non-Oil GDP Growth (%)

Real Per Capita GDP Growth (%)

2004–2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

6.2 4.8 7.9 14.0 9.3 7.3 4.0 3.8 3.7 8.4 6.3 7.6

6.2 4.8 7.6 8.6 8.6 6.7 4.0 4.0 5.0 4.0 5.0 6.0

3.6 2.2 5.2 11.2 6.6 4.6 1.4 1.2 1.1 5.7 3.6 4.9

Source: IMF (2018b: 93, 94, 82)

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TABLE 5.4 Ghanaian fiscal statistics, 2004–2019

Year/s

Government Expenditure (% of GDP)

Government Revenue (% of GDP)

Overall Fiscal Balance (% of GDP)

Public Debt (% of GDP)

External Debt (% of GDP)

2004–2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

22.1 23.6 26.8 26.6 29.8 28.7 29.4 25.0 26.1 22.5 23.0 21.7

13.6 13.4 14.4 17.1 17.0 16.3 17.7 17.6 16.6 16.7 17.7 17.8

–5.2 –7.2 –10.1 –7.4 –11.3 –12.0 –10.9 –5.4 –8.9 –5.0 –5.0 –3.6

39.2 36.1 46.3 42.6 47.9 57.2 70.2 72.2 73.4 71.8 69.1 65.9

24.1 19.6 19.4 19.3 21.8 24.9 35.8 42.8 38.5 36.5 35.3 32.0

Source: IMF (2018b, 100, 102, 103, 104, 116)

country now considered at high risk of debt related distress (IMF, 2018a: 8). The substantial fall in the prices of oil and gold at the end of the commodity boom caused devaluation of the Ghanaian Cedi. In turn, this has dramatically increased the size of external debt, held in foreign currencies, particularly dollars, driving the large increase in public debt from 2013 onwards. In order to fund its external debt obligations, Ghanaian governments have had no other recourse but to approach external credits for finance, leaving external debt amongst ‘the highest in Africa’ (Okereke & Agupusi, 2015: 58). Ghana offered $1billion of dollar denominated bonds each year from 2015–2015, significant direct lending also arising from external commercial and private lenders. Of the $18.2 billion of external loans taken by Ghana between 2007 and 2015, $8.7 billion has been identified to pay existing external debt obligations. Of that $8.7 billion, only $1.7 billion was used to pay down the total stock of external debt, whilst the remaining money was spent on interest payments (Jubilee Debt Campaign, 2016: 13). In April 2015, Ghana was forced again to the IMF, negotiating emergency funding worth $930 million over four years’ conditional on the acceptance of another SAP instructing significant reduction in government expenditure to achieve a surplus on the primary balance in the public finances, elimination of subsidies to utilities and on fuel, and a net freeze on public sector employment outside of health and education. Much like previous IMF interventions, the SAP was designed to maintain the confidence of global financial markets through structural reform of the economy (IMF, 2017: 5) and as before Ghanaian governments have complied with IMF mandated policies. Table 5.4 shows deep cuts in government expenditure, which per person stood at GH₵820 in

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2013, but has fallen to GH₵680 per person (Jubilee Debt Campaign, 2018). Ghana secured a primary balance surplus of 0.8% GDP in 2017 (World Bank, 2018), but the IMF target for a 2% surplus in the primary balance will require further reductions in government expenditure (IMF, 2018a: 9), fiscal tightening that if taken too far will inevitably threaten the valuable expenditure on social services and infrastructure necessary for further reductions in poverty and attainment of the SDGs (Jubilee Debt Campaign, 2016: 4). This is worrying, given the rise in metrics that demonstrate the unsustainability of Ghanaian development. Absolute poverty may have been falling (World Bank, 2018d), but income inequality has been on the rise since the 1980s, the country’s Gini coefficient increasing from 35.3 in 1987 to 42.4 in 2012 (World Bank, 2018a). Besides, absolute measures of poverty limited at income of $1.90 per day does not preclude huge swathes of the Ghanaian population still living in abject hardship; poverty rates show stark regional and rural–urban differentials across the country (Jubilee Debt Campaign, 2016: 12; MawukoYevugah, 2016: 59). Unfortunately, the foundations of the public debt that produces the unsustainable nature of Ghanaian development shows no sign of diminishment in 2018, ensuring continued demands for fiscal consolidation of the public finances to lower public debt and appease external creditors. Table 5.5 delineates Ghana’s borrowing plans of $3.5 billion from a variety of multilateral (IMF, World Bank) and bilateral (Paris Club, China) sources, alongside an ambiguously titled ‘other’ category, representing private creditors in the global financial markets. The planned uses of this external finance include current spending and infrastructure investment, but the overwhelming majority of external finance will be spent on the ‘other’ denomination of which we can assume, given previous expenditure, that a majority consists of interest payments on existing external debt. Signs for hope lay in the fact that Ghana is beginning to appreciate how its reliance on a narrow range of commodities to provide the foundations for economic and social improvement is limited by the unsustainable constraints of the financial dependency it propagates. A recent speech by President of the Republic of Ghana (2018), Nana Addo Dankwa Akufo-Addo argued that to lift Africa from poverty it was necessary to ‘change the structures of the economies on the continent, which are dependent largely on the production and export of raw materials. It is this reliance on raw material exports that feeds our dependence on foreign aid’ towards an industrial economy that is an industrialised valueadded economy. Imperative in this process is the use of industrial policy to prioritise economic diversification and the elevation of manufacturing (Ayelazuno, 2014); the performance of the latter has been described by the Ghanaian Ministry of Trade and Industry (MITI) as ‘abysmal’ (MITI, 2018c). Table 5.2 notes how the size of manufacturing within the Ghanaian economy has fallen from 6.4% to 4.2% GDP in only seven years from 2010 to 2017. Ghana is now the subject of a ten-point agenda for industrial transformation to support manufacturers and strategic industries (MITI, 2018a).

Source: IMF (2018a: 32)

$US Million 3,500

Volume of New Debt

469.1

411.8

119.1

2,500

455.7

Uses of Debt Creditor – BilatCreditor – Creditor – Bilateral: Paris eral: Non-Paris Creditor – Financing – Infrastructure Club Other Multilateral Club

TABLE 5.5 Ghanaian External Debt Finance, 2018

185.7

Uses of Debt Financing – Social Spending

150.0

2708.6

Uses of Debt Finan- Uses of Debt Financing – cing – Budget Other Financing

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Conclusion This chapter has adopted an older literature from the international political economy discipline to engage in a fresh critical approach to questions of sustainability in emerging markets. The chapter has found that far from a ‘model nation’, Ghana is currently located within a ‘situation of dependency’ rooted in the externally driven, and IMF-mandated, development strategy it has adopted since the 1980s. Instead of building economic and financial resilience through diversification of its economy, the prioritisation of export-orientated growth has meant Ghana has become reliant on the extraction and export of commodities for economic growth and social progress. This has increased Ghana’s exposure to dislocation emanating from the global economic system, particularly fluctuations in the price of commodities, ensuring Ghana has had repeated recourse to external creditors to fund budgetary shortfalls and the balance of payments. Forty-five years after IMF intervention that was supposed to have secured ‘external payments viability’, Ghana is still financially dependent on external creditors, particularly commercial entities in the global financial markets, and on the precipice of another debt crisis. It is only because of partial recovery in the prices of commodities in world trade that Ghana is currently avoiding the abyss; an unsustainable basis from which any country can hope to achieve sustained economic and social development.

Note 1 Numbers have been rounded from original data.

Reference Akonor, K. (2006) Africa and IMF Conditionality: The Unevenness of Compliance, 1983–2000 (New York: Routledge). Amin, S. (1990) Delinking: Towards a Polycentric World (London: Zed Books). Ayelazuno, J.A. (2014) ‘Neoliberalism and Growth without Development in Ghana: A Case for State-Led Industrialization’, Journal of Asian & African Studies, 49(1): 80–99. Bracking, S. (1999) ‘Structural Adjustment: Why it wasn’t Necessary and Why it didn’t Work’, Review of African Political Economy, 26(80): 207–226. Brydon, L. & Legge, K. (1996) Adjusting Society: The World Bank, the IMF, and Ghana (London: Taurus Academic Studies). Cardoso, F.H. & Faletto, E. (1979) Dependency and Development in Latin America (Berkley, California: University of California Press). Chang, H.-J. (2003) Kicking Away the Ladder: Development Strategy in Historical Perspective (London: Anthem Press). Chang, H.-J. & Gradel, I. (2004) Reclaiming Development: An Alternative Economic Policy Manual (London: Zed Books). Eyoh, D. & Sandbrook, R. (2003) ‘Pragmatic Neo-Liberalism and Just Development in Africa’ in A. Kholi, C-I. Moon & G. Sorensen, eds. States, Markets, and Just Growth: Development in the Twenty-First Century (New York: UN) 227–257.

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Fehling, M., Nelson, B., & Venkatapuram, S. (2013) ‘Limitations of the Millennium Development Goals: A Literature Review’, Global Public Health, 8(10): 1109–1122. Frank, A.G. (1967) Capitalism and Underdevelopment in Latin America (New York: Monthly Review Press). Frank, A.G. (1969) Latin America: Underdevelopment and Revolution (New York: Monthly Review Press). Frank, A.G. (1984) Critique and Anti-Critique: Essays on Dependence and Reformism (London: Macmillan). GSS (2018a) Release of the Provisional Rebased Gross Domestic Product for 2013 to 2017 (Acrra: GSS). GSS (2018b) Provisional 2017 Annual Gross Domestic Product April Edition (Accra: Ghana). GSS (2018c) Quarterly Bulletin, June Edition (Accra: GSS). IMF (1991) Ghana: Adjustment and Growth, 1983–1991 (Washington DC: IMF). IMF (2014) Article IV Consultation Report (Washington DC: IMF). IMF (2017) Article IV Consultation Report (Washington DC: IMF). IMF (2018a) Fifth and Sixth Reviews under the Extended Credit Facility (Washington DC: IMF). IMF (2018b) Regional Economic Outlook: Sub-Saharan Africa, May Edition (Washington DC: IMF). Jenkins, R. (2008) ‘The Emergence of the Governance Agenda: Sovereignty, Neoliberal Bias and the Politics of International Development’ in V. Desai & R.B. Potter, eds. The Companion to Development Studies, 2nd Edition (London: Hodder Education) 516–519. Jubilee Debt Campaign (2016) The Fall and Rise of Ghana’s Debt: How a New Debt Trap Has Been Set (London: Jubilee Debt Campaign). Jubilee Debt Campaign (2018) Ghana’s Debt Situation Worsens as Lenders Continue to Be Bailed Out, 21st May https://jubileedebt.org.uk/blog/ghanas-debt-situation-worsensas-lenders-continue-to-be-bailed-out [accessed on 20th November 2018]. Killing, T. (2008) ‘Aid Conditionality’ in V. Desai & R.B. Potter, eds. The Companion to Development Studies, 2nd Edition (London: Hodder Education) 511–515. Mawuko-Yevugah, L. (2016) Reinventing Development: Aid Reform and Technologies of Governance in Ghana (New York: Routledge). Milward, B. (2000) ‘What is Structural Adjustment’ in B. Milward & A.B. Zack-Williams, eds. Structural Adjustment: Theory, Practice and Impacts (London: Routledge) 24–38. MITI (2018a) The Ten Point Agenda http://moti.gov.gh/10pointagenda.php [accessed on 26th November 2018]. MITI (2018b) Industrial Parks and Special Economic Zones http://moti.gov.gh/industrialpark. php [accessed on 26th November 2018]. MITI (2018c) National Industrial Revitalization Programme http://moti.gov.gh/stimulus.php [accessed on 26th November 2018]. Okereke, C. & Agupusi, P. (2015) Homegrown Development in Africa: Reality or Illusion? (New York: Routledge). Opoku-Dapaah, E. (2011) ‘Ghana: Beyond the Model Nation Image’, Ghana Journal of Development Studies, 8(2): 17–37. Patömaki, H. (2009) ‘Neoliberalism and the Global Financial Crisis’, New Political Science, 31(4): 431–442. Prebisch, R. (1950) ‘El desarrollo económico de la América Latina y algunos de sus principales problemas (E/CN.12/89) (Santiago: Comisión Económica para América Latina (CEPAL)). Reed, D. (1992) Structural Adjustment and the Environment (London: Earthscan).

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Simon, D. (2008) ‘Neoliberalism, Structural Adjustment and Poverty Reduction Strategies’ in V. Desai & R.B. Potter, eds. The Companion to Development Studies, 2nd Edition (London: Hodder Education) 86–91. Williamson, J. (2004) ‘The Washington Consensus as Policy Prescription for Development’, Lecture Delivered at the World Bank, Washington DC, 13th January. Willis, K. (2005) Theories and Practices of Development (Abingdon: Routledge). The World Bank (2018) ‘The World Bank in Ghana’ www.worldbank.org/en/country/ ghana/overview [accessed on 20th November 2018]. World Bank (2018a) ‘Agriculture, Forestry and Fishing: Value Added (% of GDP)’ https:// data.worldbank.org/indicator/NV.AGR.TOTL.ZS?locations=GH [accessed on 26th November 2018]. World Bank (2018b) ‘Industry (including construction): Value Added (% of GDP)’ https:// data.worldbank.org/indicator/NV.IND.TOTL.ZS?locations=GH [accessed on 26th November 2018]. World Bank (2018c) ‘Manufacturing: Value Added (% of GDP)’ https://data.worldbank. org/indicator/NV.IND.MANF.ZS?locations=GH [accessed on 26th November 2018]. World Bank (2018d) ‘Poverty Headcount Ratio at $1.90 (2011 PPP) (% of Population)’ https://data.worldbank.org/indicator/SI.POV.DDAY?locations=GH&view=chart [accessed on 30th November 2018]. World Bank (2018e) ‘Services: Value Added (% of GDP)’ https://data.worldbank.org/indi cator/NV.SRV.TOTL.ZS?locations=GH [accessed on 26th November 2018]. World Commission on Environment & Development (1987) Our Common Future (UN: Geneva).

6 POLITICAL ECONOMY OF SMALL-TO-MEDIUM ENTERPRISE (SME) FINANCE Lessons from Root Capital Mine Aysen Doyrani

Introduction Using Root Capital as a case study in social impact investing, this chapter examines the prospects and challenges facing the global market for SME finance in developing countries. Founded in 1999 by a “non-profit impact investor” Willy Foote, Root Capital is a Massachusetts-US based nonprofit social investment fund. It is a “leading impact-first lender and accelerator of small and growing agricultural enterprises” with investments primarily focused on fair trade, sustainable agriculture and small-medium business development (Impact Assets, 2018). The company provides financial capital (mainly affordable credit) and management training to small businesses in the world’s less-developed regions such as Latin America, sub-Saharan Africa and Southeast Asia (Root Capital, 2017a). The organization aspires to carry out a unique kind of “impact investing” aiming to occupy a space between traditional philanthropy that expects no financial gain and conventional profit-driven financial markets. It connects small-scale farmers to global retailers interested in environmental and social sustainability such as Starbucks, Wholefoods and Green Mountain and enables them to obtain higher prices for their harvest of crops. Towards this end, Root Capital relies on a combination of grants and private capital. A recent study by JP Morgan and the Rockefeller Foundation (2010:16) describes Root Capital, along with ResponsAbility in Switzerland, as a “boutique investment fund” that raises “capital from a growing class of high-net worth individuals, family offices and private foundations seeking fund managers who can offer high-impact, low-risk investment options”. Its businesses range from short-term/long-term loans to

i Lehman College/City University of New York (CUNY), Economics and Business Department, New York, The Bronx, USA

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advisory services and management training in areas of inventory management, financial reporting and analysis, corporate governance and executive leadership. The majority of clients include farmers cooperatives, private businesses and federations of small enterprises in different phases of the agricultural supply chain (trading, sourcing, producing), predominantly in coffee but also pineapple, bananas and oranges, nuts, palm oil, coca, honey, peas and cereals. The most recent information indicates that Root Capital has “worked with more than 670 clients representing 1.3 million farmers and their families and $1.2 billion in economic activity” (Root Capital, 2017a). It could have been expected that the market for global micro and small and medium enterprise (MSME) finance is growing. Valued at $310 billion in 2014, the market’s size is forecasted to reach $736.5 billion by 2019, growing at a rate of 19.15 percent. This market is mainly concentrated in emerging markets such as East Asia, South Asia, Latin America, sub-Saharan Africa, Central and Eastern Europe, and MENA. The key drivers are “high economic growth in emerging markets, better risk management practices and increasing technological innovations”. Most of the MSME industries are financed by the banking sector and include retail, heavy manufacturing, general manufacturing industry, hospitality, service and other industry such as agriculture, chemicals and pharmaceuticals, textiles, and heavy industries (Technavio, 2016:5–6). Latin America represents 74 percent of Root Capital clients, among which 75 percent are in the coffee industry (Root Capital, 2013:5). Agriculture does not typically fall under the MSME industries financed by the banking sector. According to one market research report, agriculture is classified “other industry” in the global MSME financing market. The top five vendors are leading commercial banks in developed and developing countries such as ICICI Bank, Standard Chartered, Wells Fargo, Access Bank, IFIC Bank. The financial crisis of 2008 contributed to the MSME finance gap due to greater difficulties in assessing lending risks. Although the demand is on the rise again, the crisis “has forced the MSME sector to reduce production, and, consequently, reduced MSME financing” (Technavio, 2016:12) After the financial crisis, banks worldwide became more cautious in lending, further contributing to the SME finance gap in emerging markets. Other than a contracting supply of bank loans, continent-wide economic and political factors have contributed to Latin America’s appeal to boutique investment funds such as Root Capital. The majority of coffee producers are organized into big cooperatives like COOMPROCOM1 in Nicaragua (Root Capital, 2013:5). Root Capital supports coffee farmers because they have the proven track-record of organizing but also the highest environmental vulnerability (highest rural poverty) and unmet financial needs. Like other low-income regions, coffee is the most important cash crop in Latin America. It is the most productive sector both in terms of its share of GDP and in terms of the number of people it employs. According to a study on COOMPROCOM, coffee remains “Nicaragua’s most important cash crop, accounting for 14 percent of export revenue, followed by beef, seafood, tobacco, sugar and gold” (Root Capital, 2013:8).

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Most importantly, coffee farming retains the typical characteristics of land ownership in Latin America. It has been subject to takeover by local elites and popular struggles to redistribute land from large estates to smallholder farmer cooperatives. Since the 1990s, government support for rural cooperatives in the poorest countries like Nicaragua has been decreasing. This has accelerated the trend towards expropriation of land by former large landowners. Deregulation facilitated the emergence of more competitive and market-oriented groups of cooperatives with rising membership. This is when the social investment funds started to fill the vacuum left by commercial banks, private donors and public sector banks. Impact investing relies on a business model that transcends standard charity or non-profit financial assistance. This entails working with investors who invest their funds in small business establishments (mainly in agriculture). These investors are not only philanthropic foundations but also corporations desiring “supply chain stability” like Starbucks (Doran et al., 2009:24). Due to their low profitability potential, the small agricultural enterprises do not attract mainstream investors. They are either too big for micro-loans or too risky to take out a bank loan, therefore underserved by commercial banks. While investors still receive a financial return on their investments, it is expected that the size of return should be proportional to the investment’s impact on the community. Following this “stakeholder view” of finance, Root Capital lends to companies that have an established reputation of creating social and environmental impact such as investing in deep water fountains, ecosystem conservation, road construction equipment, sustainable farm practices and clean technologies (Brussel, 2012). With financial capital and training focused on corporate social responsibility, Root Capital clients have become reliable suppliers of more than 120 buyers in advanced capitalist countries such as Starbucks, Body Shop, Keurig Green Mountain, Pier 1 Imports and Whole Foods (Keohane, 2016:117). For people living in the Caribbean and Latin America, social investment funds could serve as a model for commercial success since so many people, especially in Europe and American cities, are sensitive to the questions posed by social responsibility, fair trade and sustainable development. Using Root Capital as a case in social impact lending, this chapter examines the business model of stakeholder-oriented financial institutions that lend to rural small businesses in the hope of fostering growth in developing countries. It examines the business strategies of impact lenders and growing interest in social enterprise/developmental agendas. This is followed by a discussion around the potential of the firm and how it could be leveraged to rise up to various challenges. The aim of the paper is to show how social investment funds like Root Capital operate to fill in the vacuum of conventional banks and official foreign aid (World Bank, IMF, USAID), inventing “hybrid” business models that also benefit investors. The article also investigates the possible dilemmas for stakeholder financial institutions as they increasingly adopt the features of shareholder (for-profit) lenders under market pressures and financial crisis. Finally, lessons from microfinance are discussed, so as to give a systematic picture of the social enterprise/development literature, which might prove useful for public advocates and researchers.

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Social enterprise–developmental agenda: a brief literature review Impact investing revolves around the concept of “social enterprise” that goes beyond meeting the immediate interests of shareholders of for-profit corporations. Social enterprises are usually organized as small-and-medium enterprises (SMEs) as key drivers of growth and job creation in developing countries. The investments made into such enterprises are intended to generate tangible “social and environmental impact alongside a financial return” (GINN, 2017:1). According to Phillips et al. (2015), academic research into social enterprise/social business topics has accelerated from across a variety of disciplines over the last five years. Much of the interest can be attributed to growing discontent with existing for-profit business models and greater acknowledgment that socially responsible businesses are more capable of solving crucial social and/or development problems. There is a debate over how socially responsible businesses (or impact investors) deliver value to stakeholders underserved by traditional financial institutions. Impact investors can take a variety of organizational forms. While the term social enterprise is often used interchangeably with businesses not prioritized by profit, it encompasses a variety of “stakeholder-oriented” institutions and impact lenders, such as mutual, co-operative, and co-owned businesses, social investment funds, social businesses, credit unions, cooperative banks (or financial cooperatives), micro-credit institutions and public–private partnerships, and so on. As Chell (2007) argues, social enterprises are distinguished from private businesses by relying on “mixed funding sources”. They are characterized by a “double bottom line” which complicates management, ownership and control efforts. They also enjoy laxer operational and regulatory environments. For instance, social enterprises “may get tax breaks that the private sector business does not, they can often draw on voluntary sources of labor and expertise, and their social mission may give them a unique selling proposition (USP) vis-à-vis competing Enterprises” (Chell, 2007:12). In assessing the contribution of social enterprises, the literature evaluates their social impact. Although each social enterprise is organized differently, the business model of SME finance has received the most attention. An ILO report by Birchall (2013) argues that financial cooperatives were most resilient in the aftermath of the 2008 financial crisis. Most survived the crisis without needing any public bailouts or massive credit rationing. Credit cooperatives continued to lend to SMEs and low-income people when other banks stopped lending. This enabled the banking system to stabilize, and “to regenerate local economies, and (indirectly) to create employment”. The report explains these outcomes in terms of the business model of cooperatives, which combines member ownership, control and benefit (Birchall, 2013:1–3). Seen against this background, it is often claimed that impact lenders like financial cooperatives can be more stable and risk averse. This derives from a business model that aims to benefit members rather than maximize profit. Performance depends on “retained profits” as a main source of capital and additional reserves. Since financial

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cooperatives are customer-owned entities with no external shareholders, each member has one-member share which cannot be traded or transferable without others’ approval. Members exercise “one person–one vote” principle regardless of the amount of capital they invested (Birchall, 2013:2). Reid and Griffith (2006) critique some of the assumptions in social enterprise through the lenses of institutional “isomorphism” developed by DiMaggio and Powell (1983). One assumption is the much acclaimed “difference” of social enterprise as having a “second bottom line”. This errs in treating them as formal structures that will always follow the same pattern. As argued, “these patterns and structures become institutionalized as norms, standards and ideals, not necessarily because they are efficient or effective but because they are seen as legitimizing” (Reid and Griffith, 2006:3). The authors argue that the motivations of social enterprises vary considerably according to institutional sectors and stakeholders that they interact and compete with. A variety of actors such as private, for-profit companies, conventional charity organizations, and not-for-profits engage in the development of social enterprise in a multitude of ways – for instance “through social investment schemes or multi-sector partnerships for community development”. This diversity creates additional incentives to vary or adopt to changing conditions. Ultimately, one source of strength is financial market diversity. Diversity of services contributes to the competitive advantage of social enterprises. The key question is whether this advantage is disappearing due to financial market pressures. As the 2007–2008 crisis has demonstrated, in countries with severe economic disruptions (Greek, Italy, UK), some of the cooperative banks were nationalized or taken over by governments. Some of them adopted features of shareholder banks (hence losing cooperative ownership to private investors, as in the case of the UK Cooperative Bank). In Italy, credit cooperatives that extended credit to local firms “have suffered from the prolonged economic difficulties” (Goglio and Kalmi, 2017:152).

Impact investing: concepts and background Root Capital’s business model was inspired by the idea of “impact investing” that originated in the UK during the 1950s. While the concept sounds quite novel recently, the practice of lending to SMEs that offer solutions to social problems and community development dates back to Commonwealth Development Corporation in 1948. Similarly, the International Financial Corporation, currently a member of the World Bank, was established in 1956 to support private-sector investments in developing countries (JP Morgan, 2010:15). Impact investing, however, entails a more hybrid (public–private) and local approach to funding SMEs, especially those in need of deeper capital pools in less developed nations. Financial capital can be socially responsible if its beneficiaries are not narrowly defined by the bottom line. To be considered an impact investment, however, the borrower’s business model should have the objective “to create

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a positive social impact beyond financial return”. Finally, the company should directly establish criteria to measure and asses social impact (JP Morgan, 2010:14). Against this background, Brest and Born describe “the practice of impact investing capaciously, as actively placing capital in enterprises that generate social or environmental goods, services, or ancillary benefits such as creating good jobs, with expected financial returns ranging from the highly concessionary to above market” (Brest and Born, 2013:24, emphasis in original). Reemerging in response to the financial crisis of 2007–2009, impact investing has entered the vocabulary of mainstream financial institutions such as JP Morgan and Goldman Sachs. As the credibility of banks was compromised by risky financial instruments such as mortgage-backed securities, the crisis raised fundamental questions about the resiliency of global markets. Large banks and borrowers in developed nations were not the only ones affected by securitized transactions. Although the crisis affected all types of businesses globally, especially commercial and investment banks, the attention naturally turned to “stakeholder-oriented” businesses like social investment funds, social enterprises, micro-finance institutions, cooperatives perceived as structurally more risk averse. Smallholder farmers in some of the poorest countries worldwide were seeking capital from micro-finance institutions and other types of lenders. The trend towards “stakeholder” finance did not develop outside of financialized capitalism or as a totally alternative business model to private banking. It became convenient when large banks pooled assets (mortgages, bonds, and loans) from multiple lenders and issued them to investors globally, clearing up bank capital and thus incentivizing further loans to capital-deprived borrowers in poor nations. According to JP Morgan, social impact investors better address the vacuum left by governmental institutions and charitable donations by mobilizing largescale private capital for social purposes. Classified as an “emerging asset class”, impact investments are in contrast to “socially responsible investments”, where the investment is solely intended to maximize social benefit rather than minimize negative impact. Investors range from philanthropic organizations to high net worth individuals and commercial financial institutions, with a variety of impact objectives (JP Morgan, 2010:5). Table 6.1 lists a variety of institutions that participate in the market for impact investments. Bugg-Levine et al. (2012) define social enterprises as “entrepreneurial organizations that innovate to solve problems. They include nonprofit and for-profit ventures, and their returns blend social benefit and financial revenues”. Impact investors will seek out social enterprises when they are profitable. For example, when they supply goods and services to a discriminating middle-class or wealthy clientele that puts a premium on environmentally beneficial or healthy goods even when they are priced above average. Less well-off customers might also be enticed to buy such products if the firm undercuts the price of competitors serving the same market. However, social enterprises are not sustainable solely on the basis of sales or investment.

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TABLE 6.1 Types of impact investors by JP Morgan

Type

Organizations

Development finance institutions

International Finance Corporation (IFC), European Bank for Reconstruction and Development (ERBD), World Bank Omidyar Network- US, Esmée Fairbairn FoundationUK JP Morgan, Citigroup, Prudential Capricorn Investment Group and New Island Capital in the US Triodos Bank in Europe and Charity Bank in the UK GGM in Holland and TIAA-CREF in the US ResponsAbility in Switzerland and Root Capital in the US General Mills, Starbucks, Danone Southern Bancorp and New York-based Carver Federal Savings Bank- US

Private foundations Large-scale financial institutions Private wealth managers Commercial banks Retirement fund managers Boutique investment funds Companies Community development financial institutions

Source: Table is author’s own. Elaborated with information from JP Morgan (2010), Impact Investments: An Emerging Asset Class, pp. 15–16, https://thegiin.org/knowledge/publication/impact-investments-anemerging-asset-class

Social enterprises are constrained by difficulties securing funding as they are not so profitable as to attract traditional financial sources. This results in a “financial–social return gap”. While providing necessities such as affordable health care, an adequate diet or safe house goods is essential, the funding costs frequently exceeds the sales of such goods. This requires the government, charities and wealthy individuals with a social calling to make up the difference. Unless such funding sources can be tapped, the firm will fail to meet its mission or spend time and energy in fundraising to such a degree that the mission becomes neglected (Bugg-Levine et al., 2012). Social enterprises use several channels in order to broaden access to capital. As Bugg-Levine et al. (2012) stress, the returns from charitable endowments are considered a “social good”, with the donor disavowing claims on assets in the case of business failure. Some foundations offer loan guarantees at low interest rates and limited/unlimited liability for the debt guarantor. This entails a higher financial risk because one party assumes a higher degree of liability if the borrower defaults. Commonly obtained by enterprises legally organized as non-profits, “quasi-equity debt” involves both equity investment and debt where the payment structure is tied to financial performance (revenue) of the social enterprise. The investment fund (donor) has a claim to a certain percentage of revenue, sharing some of the gains but also medium financial risks. UK-based Bridges Social Entrepreneur Funds represents this form of lending. Other social capital investors such as Blue Orchard and IFMR Trust use a “pooling” method, which involves securitizing microfinance loans by collecting funds from many micro-lenders and prioritizing them into different tranches of risk.

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Finally, a “social impact bond” is another option available to finance successful public programs. It brings together government and private investors; investors provide the capital needed by the borrower whereas the government offers fixed payments as long as the business generates improved social outcomes such as greater public-sector savings. Indeed, Goldman Sachs was the first investment banking firm on Wall Street to issue a social impact bond in a partnership with venture capitalist J.B. Pritzker’s foundation and even profited from it (Goldman Sachs Corporate Website, 2014). It did so by lending several million dollars to a pre-school program at the United Way of Salt Lake. The early childhood program included a project aiming “to send hundreds of low-income children in Utah to preschool through a pay-for-success agreement in 2013” (Deruy, 2015). Rural prosperity depends on stable financial assistance to agricultural producers. Long-term growth benefits farmers and rural communities under conditions of steady access to export markets. In developing countries, some of the agricultural cooperatives provide their members social benefits such as health care and education. Most importantly, they consolidate the harvest of small-scale farmers, enabling them to achieve competitive prices on global markets. Producers in less-developed countries, even those organized into cooperatives, need to access “working capital” that could “fill the gap between planting, harvesting and processing a crop and receiving payment from buyers”. Rural cooperatives’ need for capital is often unmet. Microfinance institutions do not provide loans to rural businesses in need of more than $25,000. Commercial banks do not lend to businesses without strong collateral and credit history, thus leaving “cash poor” farmers underserved (Brody, 2011:91). Such borrowers are seen as too small, too risky, and least credit worthy for mainstream financial institutions.

Root capital business model Who is Root Capital’s typical client? Root Capital’s “lending is directed towards businesses that are too big for microfinance, but generally unable to secure credit from conventional commercial banks – ‘the missing middle’ of developing-world finance” (Root Capital, 2017b). Since its foundation in 1999, Root Capital has provided loans to 350 family businesses in 30 countries. It provides capital on the premises of “99 percent repayment rate from borrowers and 100 percent repayment rate to investors” (Brody, 2011:92). The loans range from trade credit, pre-harvest credit, to Long-Term Working Capital and loans for capital expenditures. Majority of the clients include farmer associations or federations of rural producers that consist of coffee bean and coca growers, mango exporters, and small-scale farmers in need of droughtresistant hybrid seeds. Other clients include apparel manufacturers, producers and exporters of ecological textiles, furniture, and home decoration products. Fair trade, sustainable business and social responsibility have become important criteria for companies doing business in Latin America and the rest of the world. In countries where the rural poor have no chance of obtaining credit from

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traditional banks, Root Capital has made a reputation as an “agricultural impact investor”. In several Latin and Central American countries such as Peru, Ecuador and Nicaragua, it has provided loans, management training and networking among small and growing rural entrepreneurs through formal agreements with coffee cooperatives, and financed projects in health care, education, women’s empowerment and ecological preservation. Root Capital lending has extended well beyond Latin America to include big borrowers in Africa, such as Uganda Cocoa & Commodities (UCC) and the Gulu Agricultural Development Company (GADC) in Uganda. For instance, Gulu, an impoverished Northern region in Uganda is recovering from 25 years of civil war. This is where the GADC trades in cotton, sesame, chilies, maize and sunflower from 60,000 small-scale farmers (McCreless, 2017:49). Root Capital aspires to carry out a unique kind of impact investing that occupies a space between traditional philanthropy that expects no financial gain and conventional profit-driven financial markets. It relies on a combination of grants and private capital. These funds are “concessionary” in that the investors are willing to settle for less than the maximum return on their money. Most of Root Capital loans fall into one of two categories: generating a loss and therefore necessitating a subsidy, or producing a positive return but less than the market rate. Key to the firm’s investment strategy is its ability to subsidize the first category of loans with income from the second. It also relies on grants to support the subsidized loans. Root Capital sought to develop decision-making tools geared to either a single investment or a complete portfolio. As such, it had to incorporate data on the financial, social and environmental (FSE) performance for its loans. The goal was to treat FSE data holistically in order to weigh impact against financial goals (McCreless, 2017:49–50). Root Capital has adopted a strategy of extending loans to agricultural cooperatives and other farm associations that sell their crops to Fair Trade buyers. Table 6.2 presents Root Capital’s selected clients. The price risk to farmers and investors is hedged by backing those loans with advanced purchase agreements (Vecchi et al., 2017). According to Doran et al. (2009), this model of lending entails a “factoring approach”, which involves offering advance payments to borrowers against purchasing agreements with global buyers such as Starbucks and Whole Foods. For instance, Root Capital advances up to 60 percent of the “purchase contract value” to borrowers (small-scale producers), who receive financial management training. Upon receiving the goods, “the buyer pays Root Capital, who deduct the principal and interest before the balance is paid to the producer group”. Interest rates on loans vary from 10–15 percent; 85 percent of loans involve short-term working capital with borrower repayment rate remaining around 99 percent. For longer term loans, collateral is required, which is 1.3 to 1.5 times loan value, as compared to a bank rate that is double (Doran et al., 2009:24). Ranging from $50,000 to $3 million, the loans are typically short-term credit or pre-harvest loans, made to farmers to cover the cost of buying raw materials

TABLE 6.2 Root Capital portfolio: selected clients

Regions Central America

East Africa

South America

Southeast Asia

Cooperative/ Client

Location

Product

Loan Information

Maya Ixil

Guatemala

Coffee

Trade credit

COOPEASSA

Costa Rica

Space/equipment

UCCEI

Nicaragua

Organic fruit (bananas, pineapple, oranges) Coffee

SOPPEXCCA

Nicaragua

Coffee

Copiasuro

Guatemala

Honey

Fair-Fruit

Guatemala

Snow peas, sugar snap peas

COCAFELOL

Honduras

Coffee

External financing; customized financial training (internal controls, cash flows management) Education, community health Trade credit; new accounting software Harvest credit; sustainable agriculture production certifications Education

Shalem Investments The Village Nut Company Musasa Maraba

Kenya

Grains

Gender equity grant

Kenya Rwanda Rwanda

Macadamia nut processor Coffee Coffee

APROCAM

Peru

Cacao

APROCASSI

Peru

Coffee

CAC Pangoa

Peru

CAC Chirinos

Peru

Cocoa, coffee, honey Coffee

Ketiara

Indonesia

Coffee

Long-term financing Loan for paying farmer competitive prices for their coffee Cumulative working capital Cumulative financing, as well as tailored advisory services (financial planning, accounting, and cash flow management) Cumulative credit Long-term loan for renovation; financial training Trade credit loan

(Continued )

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TABLE 6.2 (Cont.)

Regions

Cooperative/ Client

Location

Product

Loan Information

West Africa

Serendipalm

Ghana

Palm oil

Lavivrie

Senegal

Rice agroprocessor

Yedent

Ghana

Grains (soybean)

Loans for timely payments to farmers General working capital; financial management training Lending for capital expenditures (soybean press)

Source: Table is author’s own. Elaborated with information from Root Capital, “Meet Our Clients”, 2017c. www.rootcapital.org/portfolio, accessed November 29, 2018

from farm suppliers. The second category involves longer-term, fixed asset loans for investments in equipment and infrastructure, with terms up to seven years. The third category involves loans for working capital with terms between one and seven years (Root Capital, 2016:9). In order to channel the capital to its clients, Root Capital received funds from the Gates Foundation and Overseas Private Investment Corporation worth $10 million. In 2015, it also partnered with the German Development Bank KfW and AdDevCo to facilitate $15 million lending for the African Farming Company that funded agricultural businesses throughout sub-Saharan Africa (Keohane, 2016:117). Partnering with commercial banks, it uses loan guarantees from the Development Credit Authority program of the US Agency for International Development (USAID) (Doran et al., 2009:25). Root Capital clients are reminiscent of the Grenada Chocolate Company (GCC) model that operates as a chocolate maker’s cooperative in Grenada. A major exporter such as the Ivory Coast is condemned for using child labor and even slavery. Mott Green, the founder of Grenada Chocolate company, who died in 2013, was a radical in his youth who was committed to growing chocolate beans on an ethical basis. Mott Green founded a cooperative company called Grenada Chocolate that has been described as one of the most pro-employee and sustainable producers in the world. They produce chocolate with organic raw sugar and machines powered by solar electric energy. For people living in the Caribbean and Latin America, this could serve as a model for commercial success since so many people, especially in Europe and American cities, are sensitive to the questions posed by fair trade and sustainable development. Given its commitment to community-driven development, Root Capital applies mainstream investment strategies, including an orientation to an “efficient frontier”. This denotes a portfolio that lies on the efficient frontier covering the maximum return for a level of risk and for a variety of investments. It expanded on this strategy so that it would cover not only risk and return, but also impact. When a portfolio

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falls within the “efficient impact frontier”, it should cover the highest impact relative to the cumulative financial return of the portfolio. In practice, the portfolio return is usually negative and requires subsidization (McCreless, 2017:49–50). Some concerns remain, however, about the effects and measurement of impact investments. How is “social impact” measured? “When Can Impact Investing Create Real Impact?” (Brest and Born, 2013). How can impact investors (like Root Capital) know that their investments will actually contribute to attaining their “social” objectives as well? Does the impact reach the bottom of the pyramid? How are the benefits distributed? What are the lessons of other impact investment strategies?

Investment analysis: financial return vs. social impact As a boutique investment fund, Root Capital builds on the model of microfinance and community development finance targeting both public good and financial returns. The problems arise, however, when measuring impact or establishing priorities; investors participating in such ventures have different opinions about the trade-off between social/environmental impact and financial return. Also, there are potential questions “about how to assess impact, and concerns about potentially unrealistic expectations of simultaneously achieving social impact and market-rate returns” (Brest and Born, 2013). Some investors will prioritize social impact while others will put financial gain first. Also, while some investors will seek to gain access to emerging markets in order to expand products for households at the bottom of the income pyramid, others will seek much larger goals such as international development. There is also a group of investors who believe that the trade-off between social impact and financial returns is not zero-sum. Financial return should not be sacrificed when social impact is generated. Given that the market for SME finance is largely untapped, it is expected that impact investments should perform better than traditional investments (Davis et al., 2012:397). How to measure the impact of social investments presents difficulties. Institutions such as Impact Reporting and Investment Standards (IRIS) and Global Impact Investment Rating System (GIIRS) develop some standardized metrics for quantifying output. While these metrics can be useful, they concentrate more on operational enterprise performance than on its products. In the field of micro-finance, we see more attempts “to evaluate the actual outcomes of market-based social enterprises. The absence of data and analysis makes it difficult for impact investors to assess the social impact of the enterprises they invest in” (Brest and Born, 2013). Root Capital measures performance by two indicators – the strength and reach of its portfolio (expected return) and the social and environmental impact of its investments (expected impact). Performance measurement falls within the parameters established by Paul Brest and Kelly Born (2013) in a Stanford Social Innovation Review article. The authors introduce three parameters of impact: “enterprise impact”, “investment impact” and “nonmonetary impact”. They define enterprise impact as

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the social value of the goods, services, or other benefits provided by the investee enterprise. Investment impact is a particular investor’s financial contribution to the social value created by an enterprise. Nonmonetary impact reflects the various contributions, besides dollars, that investors, fund managers, and others may make to the enterprise’s social value. (Brest and Born, 2013:22) Investment’s impact has also been termed as “additionality” that according to Brest and Born reflects the degree to which an investment yields resources that add to those that investors might have provided otherwise. For an investment to have an impact, it must exceed the expectations placed in it by an enterprise geared toward socioeconomic improvement. The criterion for success is whether the initial investment can attract ongoing capital or capital at a lower cost than it would have received otherwise. In “Toward the Efficient Impact Frontier” published in the Winter 2017 issue of Stanford Social Innovation Review, the senior director of strategy and impact at Root Capital explains how the impact lender “integrates social and environmental considerations alongside financial risk and return to generate the greatest possible impact” (Root Capital, 2017d). Impact ratings range between 0 and 10. To calculate that number, Root Capital begins by locating a loan within three categories of additionality. At the bottom (0 to 3.0), we will find instances in which a borrower could have gotten the loan from a commercial financial institution. The middle category (3.0 to 6.5) includes loans that might be advanced from some similar firm but not from the commercial sector. The top category (6.5 to 10) refers to instances in which a borrower would be unable to receive a loan from either a “mission-driven” or commercial lender. Next, within a given category of additionality, Root Capital rates a loan based on its expected impact. Ranging from 0 to 3.5, the score reflects the social and environmental need being addressed, its projected performance in solving the problem (2 points), and its operational scale (0.5 point). Finally, Root Capital collects data on the following indicators for measuring “enterprise impact”: 1) The level of poverty in the regions where Root Capital lends to an enterprise, 2) how an enterprise addresses poverty, 3) “Environmental vulnerability, as measured by water scarcity, soil degradation, threats to biodiversity, and exposure to climate change”, 4) obligation of an enterprise in addressing environmental vulnerability, 5) the reach of an enterprise portfolio as measured by the number of farmers and workers (McCreless, 2017:51). Figure 6.1 presents data on lending performance as measured by loan disbursements and outstanding portfolio balance in 2013–2018. A noticeable deterioration in lending performance might signal the crisis in investment climate after 2014–2015. This is followed by a slight decline in total operating expenses as a measure of operational performance (Figure 6.2). McCreless further explains how Root Capital arranges its portfolio in such a way that it measures both expected impact and expected return. The level of return is determinable and, as such, makes evaluation of loans possible. Key to this analysis is the “hurdle

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$200.00 $180.00

$177.70

$160.00

$153.90

$140.00 $122.20

$120.00

$119.80

$117.50 $103.10

$100.00

$97.30 $83.70

$80.00

$76.80

$72.30

$61.30

$60.00

$53.30

$40.00 $20.00 $0.00 2013-Q4

2014-Q4

2015-Q4

2016-Q4

2017-Q4

2018-Q3

Loan Disbursements (in millions) Average Outstanding Portfolio Balance (in millions)

FIGURE 6.1 Lending performance. Root Capital (2018), Performance Reports, 2013–2018. Available at https://rootcapital.org/about-us/financial-information/)

$18.00 $16.00

$15.00

$14.00

$15.80

$15.40

$13.80

$13.20

$12.00 $10.90

$10.00 $8.00 $6.00 $4.00 $2.00 $0.00 2013-Q4

2014-Q4

2015-Q4

2016-Q4

2017-Q4

2018-Q3

Operational performance–total operating expense (in millions). Root Capital (2018), Performance Reports, 2013–2018. Available at https://rootcapital.org/ about-us/financial-information/)

FIGURE 6.2

rate”, which is the “hurdle” above which an investment is justified based on the minimal rate of return. For this model, the score varies according to the expected return, as illustrated in the dotted line in the “Expected Return and Expected Impact” graph (refer to McCreless’ article to view this graph). That line serves as the “hurdle” above which a loan may be advanced. For a particular organization, the hurdle rate may be adjusted to reflect market conditions. If the funding tap decreases, the hurdle rate increases and thus serves to channel scarcer funds to higher-impact loans. Conversely, if the tap increases, the hurdle rate can be lowered in order to widen the range of loans. To supplement their analysis of active loans from 2015, Root Capital also considered the relationship between expected return on investment and the range of possible impacts. The analysis led them to conclude that there are trade-offs between

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financial return and impact. Typically, loans that serve the more disadvantaged population will entail increased subsidies. By the same token, loans that serve a broader spectrum of farmers and can make a material impact on the standard of living will succeed with smaller subsidies and generate higher profits. As it happens, these results are specific to Root Capital (McCreless, 2017:51–53). Furthermore, Root Capital adopts a dual approach to investment analysis. First, there is a portfolio-wide assessment based on social and environmental data. It uses social and environmental metrics (payments to producers, producers reached, household members reached, sustainable hectares under management, gender inclusion), lending performance (loan disbursements, number of loans, outstanding portfolio balance, loan–loss ratio), financial advisory services (days of training received) and operational performance (total operating expenses, debt-to-equity, capital utilization). This general assessment is followed up then by more thorough (microlevel) case studies conducted with a client. In conjunction with the credit evaluation process, loan officers use “Social and Environmental Due Diligence Scorecards” to assess the client’s practices, as well as their access to other forms of financing. Their tools include metrics developed by the Impact Reporting and Investment Standards (IRIS) that are reported in their “Quarterly Performance Reports and Performance Dashboard”, and can go even deeper in developing a profile of the client’s business. Figure 6.3 presents data on the number of producers reached as one of the metrics used for measuring social performance. For microlevel assessment, Root Capital publishes “impact studies” that conduct external surveys with clients. Nicaragua’s coffee cooperative COOMPROCOM – Cooperativa Multisectorial Productores de Café Orgánico de Matagalpa – is one of these studies. The survey shows that Root Capital has supported COOMPROCOM’s steady growth after disbursing its first loan. Since 2010, the coffee cooperative has received financial training and $2 million aid that consists of pre-harvest loans and trade credit loans. With these loans COOMPROCOM was able to buy more than 520,000 pounds of coffee from 200 farmers. Membership in the cooperative increased by 25 percent from the 744

800 600

600

655

687

587

627

400 200 0 2013-Q4

2014-Q4

2015-Q4

2016-Q4

2017-Q4

2018-Q3

FIGURE 6.3 Number of producers reached (in K-thousands). Root Capital (2018), Performance Reports, 2013–2018. Available at https://rootcapital.org/about-us/financialinformation/)

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2009–2010 crop season to 2011–2012 season. Producers saw an increase of 195 percent in the amount of money COOMPROCOM paid. The volume of coffee exports grew by 75 percent against an increase of 130 percent in revenue (Root Capital, 2013:4).

Political economy of SME finance: lessons from microcredit There are several organizational and environmental challenges facing social investment funds. Root Capital builds on the tradition of microfinance and community development finance targeting both special impact and financial returns. As a financing strategy, however, microcredit has failed in post-apartheid South Africa since it relies on traditional market-driven imperatives. Investors are fleeing the microcredit arena out of fear that it will soon implode. Boutique social investment funds are no exception to this problem. A problem emerged within the South African microcredit sector at the outset out of its “anti-developmental” tendencies, as noted by Bateman (2013). Ideally, it is meant to finance small businesses but in reality, it became a means of fostering consumption rather than production. It enticed poor households to raise the funds needed to buy household goods. Because of a stagnant economy, the poor lacked the steady income to meet payments on a microloan. Forced under duress to stave off the debt collector, the poor resorted to selling household goods and borrowing from friends and family. And in a vicious cycle, some simply took out new microloans to pay off old ones in the same way that those in debt in more advanced countries trade in one credit card for another. Furthermore, within the small number of enterprises that manage to generate income, few contribute to economic development or reducing poverty. Concentrated mostly in the informal economy such as street vending, microcredit has not “lifted any boats” in the surrounding community. Advancing loans in such an environment simply could not lead to the next level of economic development, most particularly job and well creation (Bateman, 2013). Further obstacles remain to SME financing in less developed countries. One of them is the natural tendency of SMEs “to be informal, young, have less publicly available information, and operate in unfamiliar sectors, all of which results in higher information asymmetries and risk” (Abraham and Schmukler, 2017). Even as Root Capital admits, it has discovered that their loan officers cannot always gather reliable data on the social and environmental standards of the farms and ranches that they finance or the petty proprietors with whom they are affiliated. This is due primarily to being forced to rely on the word of those receiving credit at face value. To make sure the recipients of credit stay honest, Root Capital is constantly reviewing and making necessary changes to its due diligence toolset (Root Capital, 2017b). In order to assess the value of its role in financing and training Nicaraguan farmers benefiting from the client COOMPROCOM, Root Capital has conducted a field study during the summer of 2012. This included interviews with a random sample of 48 farmer members and a survey of “Progress out of

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Poverty Index” (PPI) indicators with 210 members. Root Capital’s research department found that 11 percent of COOMPROCOM members fall below the extreme poverty line of $1.25 per day (2005 Purchasing Power Parity), which compares 66 percent of Nicaragua’s rural population and 12 percent of the total population living below the extreme poverty line. Notwithstanding the comparatively low percentage of extreme poverty for the rural population, nearly half of COOMPROCOM members still fall below the $2.50 per day line established for the global population, a graphic indication of poverty and the need for aid from COOMPROCOM (Root Capital, 2013:5). The other problem is related to the measurement of social impact using various metrics, score cards, interviews and personal discussions. Studies based on quantitative scoring assign a value based on beliefs about how something should be done. Yet can such a value truly inform users of the assessment method anything about the true impact? Quantitative scores have credibility inasmuch as they provide data-driven pictures on social impact but they can do so at the expense of omitting more complex factors crucial to measuring the overall economic impact. More critically, they can be used to induce behavior designed to increase scores at the expense of critically needed economic practices. If 85 is considered a “good” score, the impact assessment might shed light on performance but this provides few insights into how it compares to lower or higher scores. With respect to the “Social Return on Investment” (SROI) framework, we get a cash value based on a score. This risk is missing the social or political impact that in the final analysis is key to impact investing (Florman et al., 2016:15). Florman et al. (2016:16) note that “insufficiently transparent” data is one of the key problems in social impact studies. The data used in impact measurement is generally not available to the public and as such lacks the transparency needed to evaluate them fully. For example, HIP scores (“Human Impact + Profit Scorecard”) combine interviews and secondary research. From a social science standpoint, this is inadequate to verifying the results. For the general public, this means being unable to reproduce the data upon which the score is based.

Conclusion Root Capital is a non-profit social investment fund that aims to promote development in Latin America and Africa by lending capital and providing financial training to small and growing rural businesses. Using an in-depth case study, this article examined Root Capital’s financing and investment strategy as an example of “impact investing: an emerging asset class”. Root Capital builds on the “legacy” of microfinance and community development finance, targeting both social impact and financial returns. It does so by relying on a combination of grants and private capital. Without underestimating their contribution to social enterprise/developmental agendas, this article has grappled with the prospects and challenges facing social impact investors as they strive to strengthen global market connections for small-to-medium sized enterprises.

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This article concludes with a note on the political economy of SME finance by drawing lessons from microcredit and social impact studies. Higher information asymmetries and risk derive from the very nature of SME financing, which can easily exacerbate under market competition and lax regulatory environments. Social investment funds may fell prey to the same underlying tendencies as the microcredit industry in South Africa. As explained earlier, despite its commitment to community development finance, Root Capital uses mainstream investment strategies including an orientation to an “efficient frontier”. In order to make microcredit a feasible market-driven entity, microcredit institutions relied on the same commercialization that prevailed on Wall Street. With prominent financial authorities such as Alan Greenspan and Ben Bernanke giving their blessing to microcredit entrepreneurialism, policy makers naturally preferred relaxed regulatory standards such as existed on Wall Street (Bateman, 2013). Naive faith was placed on such creditors being guided by ideals rather than base profit-seeking motives. As might have been predicted, the microcredit world behaved no differently than the major investment banks and with the same contradictory results. Future research can evaluate which markets social investment funds are particularly attracted to and why and how this might further contribute to the goals of development finance globally. This requires critically examining the key motions of impact lenders such as Root Capital and how they are approaching SME finance in innovative and different ways.

Note 1 Cooperativa Multisectorial Productores de Café Orgánico de Matagalpa

References Abraham, F., and Schmukler, S. 2017. “Addressing the SME Finance Problem.” Research and Policy Briefs No. 9, World Bank. Available at http://blogs.worldbank.org/allabout finance/addressing-sme-finance-problem (Accessed: December 2, 2017). Bateman, M. 2013. “Microcredit has been a disaster for the poorest in South Africa”, The Guardian, November 19. Birchall, J. 2013. Resilience in a Downturn: The Power of Financial Cooperatives. Geneva: ILO (International Labor Office). Brest, P., and Born, K. 2013. “When can impact investing create real impact?”, Stanford Social Innovation Review, 11 (4): 22–31. Brody, L. 2011. “Root Capital: A case study in impact investing”, Americas Quarterly, 5 (4): 91–93. Brussel, J. V. 2012. “Root capital works to alleviate poverty through agricultural development”, Huffington Post, October 16. Bugg-Levine, A., Kogut, B., and Kulatilaka, N. 2012. “A new approach to funding social enterprises”, Harvard Business Review, January–February issue. Available at https://hbr.org/ 2012/01/a-new-approach-to-funding-social-enterprises (Accessed: November 13, 2017). Chell, E. 2007. “Social enterprise and entrepreneurship towards a convergent theory of the entrepreneurial process”, International Small Business Journal, 25 (1): 5–26.

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Davis, K., Fisher, A., Kingsbury, B., and Merry, S. E. 2012. Governance by Indicators: Global Power through Quantification and Rankings. London, Oxford: Oxford University Press. Deruy, E. 2015. “How Goldman Sachs made money investing in preschool in Utah”, The Atlantic, October 28. DiMaggio, P. J., and Powell, W. W. 1983. “The iron cage revisited: institutional isomorphism and collective rationality in organisational fields”, American Sociological Review, 48 (2): 147–160. Doran, A., McFayden, N., and Vogel, R. C. 2009. “The Missing Middle in Agricultural Finance: Relieving the capital constraint on small hold groups and other agricultural SMEs,” Oxfam GB. Florman, M., Klingler-Vidra, R., and Façade, J. F. 2016. “A critical evaluation of social impact assessment methodologies and a call to measure economic and social impact holistically through the External Rate of Return platform”. Available at www.lse.ac.uk/ businessAndConsultancy/LSEConsulting/pdf/Assessing-social-impact-assessmentmethods-report.pdf (Accessed: November 14, 2017).. GINN. 2017. “Annual Impact Investor Survey 2017”, GINN, Global Impact Investing Network. Available at https://thegiin.org/assets/GIIN_AnnualImpactInvestorSur vey_2017_Web_Final.pdf (Accessed: November 26, 2018). Goglio, S., and Kalmi, P. 2017. “Credit unions and co-operative banks across the world”, pp. 145–157, in The Oxford Handbook of Mutual, Co-Operative, and Co-Owned Business edited by Jonathan Michie, Joseph R. Blasi, Carlo Borzaga. London, Oxford: Oxford University Press. Goldman Sachs. 2014. “Social Impact Bonds”. Available at www.goldmansachs.com/ourthinking/pages/social-impact-bonds.html (Accessed: November 13, 2017). Impact Assets. 2018. “An Annual Showcase of Impact Investment Fund Managers, Root Capital”. Available at www.impactassets.org/ia50_new/fund.php?id=a014400000jQno hAAC (Accessed: November 23, 2018).. JP Morgan. 2010. Impact Investments: An Emerging Asset Class. JP Morgan and the Rockefeller Foundation. Available at https://thegiin.org/knowledge/publication/impact-investmentsan-emerging-asset-class (Accessed: November 13, 2017). Keohane, G. 2016. Capital and the Common Good: How Innovative Finance Is Tackling the World’s Most Urgent Problems. New York, NY: Columbia University Press. McCreless, M. 2017. “Toward the Efficient Impact Frontier”, Stanford Social Innovation Review, 15 (1): 49–54. Phillips, W., Lee, H., Ghobadian, A., O’Regan, N., and James, P. 2015. “Social innovation and social entrepreneurship: A systematic review”, Group & Organization Management, 40 (3): 428–461. Reid, K., and Griffith, J. 2006. “Social enterprise mythology: Critiquing some assumptions”, Social Enterprise Journal, 2 (1), 1–10. Root Capital. 2013. Case Study–COOMPROCOM Nicaragua. Cambridge, MA: Root Capital. Root Capital. 2016. Combined Financial Statements, Supplemental Schedules and Report of Independent Certified Public Accountants, Root Capital, December, 2016 and 2015. Available at www.rootcapital.org/sites/default/files/financials/rootcapitalfinancialstmt2016.pdf (Accessed: November 13, 2017). Root Capital. 2017a. “About us”. Available at www.rootcapital.org/about-us (Accessed: November 23, 2018). Root Capital. 2017b. “Our approach”. Available at www.rootcapital.org/about-us (Accessed: November 13, 2017).

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7 PERSPECTIVES ON GOVERNANCE AND DEVELOPMENT OF SUSTAINABLE ECONOMY Institutional policies, challenges, and scenarios in Kenya Andrew Amayoi Introduction This chapter is based on highlights of researched evidence of popular and neglected perspectives in policy, theory, and practice in sustainable development advocacy. Moreover, it is centered on the evolving challenges and contexts in promoting this ideal, particularly in the Kenyan context. It provides a platform for assessment of current theory and the development of new theoretical and practice based perspectives in shaping future discourse in policy and practice based interventions in the field of globalization, governance, corruption and sustainable development. A key question raised is the examination of the role of governance of institutions in safeguarding development aspirations in developing countries like Kenya. Relatedly, within the highly globalized world, it is essential that nation states within developing economies take critical views and strategic steps in order to realize the promise of expected growth and development. Relatedly, this role is viewed through various lenses including whether governance can be linked to development, the contribution of global governance and the knowledge based economy and wider paradigms on economic globalization. This would also seek to challenge prevailing ontology and discourse on development in Kenya and the wider African continent through multifaceted lenses. Specific paradigms related to movement of state power outwards and inwards ultimately focus on views of the role of the state and the emergent enabler paradigm.

i Birmingham City University, UK

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The sustainable development paradigm is thus contextualized and contrasted with identified development aspirations and challenges including a review of governance and corruption in Kenya. Kenya has long been a posterchild of the African rising narrative. This narrative is characterized by a positive view of current and future socio-economic development that in part seeks to replace the largely metaphorical view of decline illustrated by views on political instability, poor governance, dependency etc. Related views coincide with perspectives on the need for greater critical examination of etymology and ontology on Africa’s development, the global south aspirations and challenges and governance away from erstwhile unbalanced western perspectives. The Africa rising narrative has received wide readership and debate with sub-views of the rise of Africa’s middle class, rise of power, women, innovation etc. It has, however, been polarizing with views on its emotive and one-dimensional focus on aspects such as GDP without due regard for real or perceived progress for specific stakeholders in the last decade. Relatedly, Kenya’s experience of positive key development growth indicators led to its lower-middle income economy status by the World Bank. However, critics argue that this was largely as a result of a change in the way the size of the country’s economy is calculated which resulted in a 25% increase in gross national income per capita (GNI). (Business Daily, 2015). Kenya has additional sustainable development aspirations to grow into a developed economy and has a vision 2030 that seeks to operationalize this aspiration. There are issues challenging this aspiration, though. A few critics, the World Bank among them, consider the aspiration to become a developed economy by 2030 “farfetched”, in the face of stagnant manufacturing, youth unemployment and corruption. (World Bank, 2016). A key challenge is represented by the dubious distinction of being ranked 144 out of 180 countries in transparency international’s corruption perception index 2018 with a score of 27 out of 100 indicating a high perception of public sector corruption in the country, (Transparency International, 2019). This isn’t a new trend and has been cited as one of the key challenges towards the vision 2030 aspirations with several policy makers, researchers and practitioners calling for more to be done to safeguard the development aspirations through improved governance. An illustration of these trends in Kenya’s overall country profile can be seen in Figure 7.1 that highlights Kenya’s growth segments and the challenges within governance and economic development. Aspects of these details shall be showcased within this chapter and shall draw from related theories and stakeholder perspectives. Overall, these will aim to contextualize the increasing need to address prevailing perspectives and contemporary trends in global and national governance including relevant interventions as advocated by proponents of the theory on the role of the state.

Perspectives on governance and development

FIGURE 7.1

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Kenya country profile (Bertelsmann Stiftung, 2018)

Is global governance linked to development? In the ever-changing landscape of globalization there has been increasing interest in research discussing the increasingly polarized view of sustainable development particularly in emerging and frontier economies. Contemporary discussions have focused on the views of traditional proponents of globalization with the expected growth and development being core to this argument as well as the evidence of growth in particular nation states beyond just the emerging economies. Specifically, prevalent arguments on economic globalization and positive development consequences for frontier economies have centered on firm based views on large captive markets on the output side and resource seeking themes on the input side.

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Conversely, there have been ongoing critical views on firms, societies and nation states that do not realize the full benefits of development as espoused by the theoretical tenets of conventional globalization. (Stiglitz, 2003) Key arguments on economic globalization and negative consequences for frontier economies have included thematic areas over “inequality” and “exclusion”, population and demography, increased financial risk and dependency. Overall, much of the research has focused on the broad theoretical analysis of globalization and various roles of key stakeholders as well as perspectives on the role of governance in safeguarding future growth and development in the face of prevailing challenges. Moreover, a book titled does good governance lead to good development? Highlights the importance of the state in taking a key role in spearheading strategic development whilst being cognizant of prevalent contextual, theoretical and policy based implementation and impact (Sundaram and Chowdhury, 2013). Relatedly, the prevalent neoliberalist era characterized by freedom of firms and nation states in setting and controlling their development aspirations calls for a greater focus on emergent perspectives on the role of nation states in safeguarding their development aspirations.

Whose role? Global governance paradigms and stakeholder perspectives It can be viewed that through the role of global governance, global transnational institutions, national governments and firms have all tried to adapt in various ways with a view of safeguarding their long-term development interests. Lavalette and Pratt (2007) refer to Global Governance in contemporary practice as the Changes in government roles and activities which are a consequence of assumed economic and social transformations in the global era With globalization, these assumed changes in global economic structure imply that a nation state (especially in capitalistic regimes) cannot control or manage in the old way and highlights the need to continually learn and adapt to new methods towards social reform and development. A caveat within the construct of global governance is linked to the very premise that not all nation states realize the positive attributes of economic globalization. Thus, the consequences of modern governance on a global scale are also open to questioning by some authors, many of whom have singled out institutional stakeholders, e.g. Bretton Woods’s organizations, and provided theoretical and contemporary case study based perspectives that call for a measured, more researched approach to the application of global governance for sustainable development.

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Adam, Collier and Ndung’u (2010) go further with a call towards a critical perspective on global regulation – both of the power of global organizations and of nation states. They reveal the need to embed greater accountability of Bretton Woods institutions, curtailing of global competition, reforms within the United nations, strengthening of global political, legal and social rights, and empowering the civil society. This still begs the question, is safeguarding sustainable development aspirations the preserve of global or national (state) governance? The contemporary relevance of this question in the current era of neoliberalism, increasing nationalism and in frontier economies characterized by aspects of dependency on globalization and supranational institutions adds the need for closer examination. An additional question prevails on the specific role of power, especially in creation and implementation of policy based interventions to meet state (and global) aspirations in contemporary practice by frontier economies. Overall, an analysis of current literature and of proponents of global governance, reveals two main paradigms: Firstly, the movement of the power of the state outwards i.e. towards global markets, multinational corporations, supra-national state organizations and global organizations, e.g. World Bank including regional integration blocs such as the European Union (Lavalette and Pratt, 2007). A key example of this has been the adoption of global policy based perspectives, e.g. the Sustainable Development Goals that were put in place to keep the momentum of the Millennium Development Goals and the associated Global Development Framework (UNDP, 2018). Relatedly, it is widely accepted that most developing countries (especially in capitalistic regimes) have aspirations to grow their local economies and become globally competitive in specific sectors that contribute towards their GDPs. This is true on a national scale and at a global/multilateral scale. In line with Sustainable Development Goals, one of the relevant constituent global aspirations is to: promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels (UNDP, 2018). The second perspective is the movement of the power of the state towards localized regions, organizations and large cities, e.g. London and Nairobi. These regions are noted for their flexible dynamic operations, e.g. in attracting investment – thus curtailing the perceived size and role of the larger state. This is prominent in highly globalized, democratic and devolved nation states like Kenya. A more salient view from authors such as Janet Newman (2006) who argues that trends that challenge the capacity of the nation state to control their environment are very prominent. Similarly, neoliberalist policy makers argue that nationalism is impotent at the face of the forces of globalization. They thus argue for an “enabler” state view of economic expansion (Doyle, 2005; Lavalette and Pratt, 2007).

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This call for a balanced view also stems from a perceived lack of guaranteed mechanisms to enforce global governance, e.g. to force states to sign up or consent to international agreements even where there are penalties for not meeting set targets. This view, however, doesn’t abdicate national states from their role of setting and meeting their own development targets with a view of the overall welfare of the citizens whilst learning from the globalized view of development today (Lavalette and Pratt, 2007). It presents the need to critique the role of the state further, which is explored in later sections. Furthermore, it can be appreciated that Kenya has evidence of both paradigms on global governance. The first paradigm of movement of the power of the state outwards can be evidenced by the embedding of global supranational governance contributions in Kenya’s Vison 2030 exploring its target towards becoming a developed, knowledge-led economy. This is aligned to the Millennium Development Goals and embedded within state institutions such as the Ministry of Education and its constituent governance structures (Ministry of Education, Science and Technology, 2015; Sehoole and Knight, 2013). The supranational institutions, however, view this as a more emergent collaborative governance approach and not based on imposed power structures. Relatedly, the OECD stipulates that knowledge-based economies use their resources, institutions and systems, e.g. science, to contribute towards shared knowledge production, transmission and transfer (OECD, 1996). The World Bank has taken a stronger stance in explicitly contributing towards the above functions, e.g. through a focus on enabling learning and informed governance in public sector governance to meet sustainable governance targets and policy based interventions. Conversely, Spicer (2016) illustrates that critics of the knowledge economy paradigm have stated that it is a myth and have argued against defined gains of nations and institutions in specific regions, e.g. developed countries. Additionally, they have argued that best practice and well-intended information doesn’t always translate to real practice-based positive development. Overall, the above trends are correlated to the theoretical benefits realized by the alignment towards supranational institutions versus the perspectives on dependency by frontier economies illustrated previously. The second perspective is the movement of the power of the state towards localized regions, organizations and large cities, e.g. its constituent county governments. After the 2010 referendum that saw the birth of the new constitution in Kenya (operationalized after the general elections in 2012), Kenya moved towards a devolved system of governance. The resultant state power shift towards the 47 counties with their development aspirations saw them work in cooperation and consultation with the national government (Republic of Kenya, 2011). This was envisaged to enable the local governments to respond with dynamic requirements and potential, e.g.

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in sector based investments. Many have realized some of these aspirations with notable development in specific sectors relevant to their regional issues, growth segments and geopolitical aspirations. Conversely, there have been negative consequences, chief of which is weak institutional governance and “devolved corruption”. This chapter shall highlight the role of national governance and shall not delve into the details on regional governance in order to provide more depth to the wider context and room for further research in elements such as decentralized environments.

The emergent enabler paradigm: the role of the state in governance and development As mentioned in the first section, a more salient view advocates for a more salient enabler state view in response to the forces of globalization. This is consistent with the emergent perspective in Kenya illustrated by proponents of the role of the state view, and the contextualized Africa rising and the global south– south development narrative. The theory of the role of the state in economic development is a cardinal yet polarizing neo-classical economic theory. The theory asserts that Government incentives to enact sound policies are key to economic success (ODI, 2006; Tabellini, 2005). Very little work has been done to look into the role of the state within the African context. Existing work has focused on the East Asian, British, Indian experience etc. A key aspect of this in developing countries has been the acceptance that states don’t merely intervene in markets, but underpin and help to constitute their very existence, particularly in the application of global macroeconomic and regulatory tools to control and stimulate economic activity; e.g. industrial policy agencies and institutions promoting growth and enabling conditions for knowledge-based structural change (Kozul-Wright, 2009). Within this model is the need for cohesive national governance that creates policies and institutions that promote growth and reduce the negative effects of existing or foreseen challenges to strategic growth ambitions at state level.

Which state? The role of the state in the Africa rising, neoliberalist perspective In assessing the role of the state, it is important to assess the contemporary context of this role in the Africa rising, global-south, neoliberalist and often times nationalist narrative that is prevalent today. A key piece of popular discourse has been on the Africa rising paradigm with many authors singling out the continent as the next, and in some instances, the last region that will have unprecedented growth. An illustration is in 2010, six of the world’s ten quickest developing economies were in subSaharan Africa.

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With estimates pointing at unprecedented growth in the ten-year period prior saw sub-Saharan Africa’s GDP rate increase by 3.3% compared to the previous 20 year period. These indicators that led to the Africa rising perspective were first made popular by The Economist (2011) publications. However, there has been raging debate about this view despite proponents singling out key positive indicators. Specific thematic drivers of this growth and positive indicators include • • • • • • • • • •

growing consumption patterns, enhanced governance, accountability and democracy, the commodities “boom” and asset based resource seeking from developing Asian economies, sector based developments in manufacturing and the service sector, urbanization and growing young population and growing middleclass whilst several developed economies grapple with the potential aging population paradigm liberalization of global trade and liberalized national economic strategies, innovation and technology growth e.g. Telecom infiltration going from 0.7% to 70% in under 10 years, access, skills and productivity etc., privatization, end of the debts/dependency, monetary and foreign investment reforms especially in extractive centered economies, increased regional economic participation, liberalization of agricultural sector.(De Waal, 2003; Waldbrook et al., 2013)

Various supranational organizations support this view with institutions such as the IMF projecting that Africa will have seven of the ten developing economies in the next five years. This perspective is also supported by wider regional and supra-national perspectives on global south–south development. An illustration of this is the United Nations Office for South–South Cooperation (UNOSSC) that deliberately connects development stakeholders to scale up “Southern-grown” activities to help accomplish the 2030 Agenda for Sustainable Development. In the broader context of the impact of neoliberalist and nationalist perspectives in contemporary practice, several African states have focused on tapping into their own development potential in the wave of the Africa rising paradigm. This has led to more nationalistic perspectives drawn from views on institutional autonomy and freedom to adopt best-fit policies and strategies. Overall, the Africa rising narrative has revealed great potential for the continent – often times amidst the slowing or even decline of other regions in terms of projected development and competitiveness. Conversely, many (The Economist, 2011; Obeng-Odoom, 2014) have argued for a balanced view with evidence of recurring challenges including;

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Comparison of historical GDP growth rates of country stability rankings Bubble size represents country GDP, 2015

Quadrant share of selected countries’ GDP

Real GDP growth, 2010–151 Compund annual growth rate % High growth

11

10 Ethiopia 9

Vulnerable growers 35%

Stable growers 19%

Democratic Republic of Congo

8

Mozambique

7

Ghana

6

Rwanda

Tanzania

Burkina Faso Nigeria Gabon Cameroon

Côte d’lvoire Kenya

Togo

Zambia

Morocco Uganda

Angola Namibia

5

Botswana Senegal

Algeria

4

Mauritius Global

Mali Egypt

Madagascar

2 Tunisia 1 Low growth

Sudan Libya

South Africa Slow growers 46%

Equatorial Guinea

0 Relative stability ranking, 2015

Midpoint Vulnerable

Score Stable

1 The Index covers 30 economies accounting for 96% of GDP, Equatorial Guinea and Libya are plotted manually because of negative growth rates over this period

FIGURE 7.2

• • • • • • •

Growth categories and stability in Africa’s economies (WEF, 2016)

Life expectancy and overall healthcare for the large population Drought famine and climate issues Risk and dependency on specific resources e.g. oil (see Figure 7.2) Efficacy of real GDP growth and calls for a more measured look at indications Governance, accountability and corruption Dependency on China and “go-east” strategies Slow and differentiated growth amongst African nations including the slow growth of some key growth nations like South Africa in the last ten years

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Perspectives on governance in Africa: reviewing etymological and ontological perspectives and shared mental models Overall, from the content and figures above, it is notable that the potential of the Africa rising narrative can be viewed in the face of the very real challenges that the continent faces and from differing development indicators and institutional lenses. A key emerging theme is the role of governance and the challenge of poor governance in the setting, acceleration and realization of development targets at supra-national/global, regional and national scale. Indeed, there has been prevailing evidence on key development indicators, e.g. the Transparency International sub-Saharan Africa corruption index (Transparency International, 2018), and others that suggest that some of the positive developmental factors, if not governed well, could also be causes of Africa’s downfall or might just be the next development myth (Drummond et al., 2014; Kempe Ronald Hope, 2012; Mahajan, 2009; Taylor, 2014). Moreover, both supporters and those opposing the Africa rising paradigm agree that there is a need for further research and a balanced perspective when it comes to assessing the current and future growth potential of the region. Overall, a key barrier to the understanding of the impact of corruption and governance in sustainable development has been differing perspectives on the meanings and implications of the very terms themselves. This is true at a global, national, institutional (including in pedagogy, research and contemporary practice) and even socio-cultural and individual level, and it challenges the very notion of global governance and state led interventions to safeguard growth aspirations. Lavalette and Pratt (2007) define governance as an analytical term that refers to various relationships of power and regulation, the forms of authority and the interconnected networks that are utilized and shape a particular approach to governing. Paul (2017), however, asserts that the term governance is ubiquitous in the lexicon of development. For the purposes of this discussion, the term has been used to describe the direction of public affairs through formal executive and bureaucratic processes where direct popular participation is limited to periodic voting conducted within widely varying limits of political choice. It does acknowledge that governance accommodates a degree of informality in choice decisions, with general consensus being derived from multiple sources of legitimate authority (Stevenson and Dryzek, 2014). It is important to note that there isn’t an agreed definition of the word governance or even of good governance with most authors appreciating that application and best fit are contextual at best and must not dismiss prevailing examples and modes of operation (Carothers and de Gramont, 2011: 11, 18; Grindle, 2004; Rodrik, 2008). Thus, the chosen definition deviates from the World Bank definition of governance as “rule of law”, control of corruption, accountability, political stability and voice in collective forms of participation in governmental decision making. This according to various authors is a didactic approach based on presumed universality of the western experience of democratization. It does, however, lend itself to ease of measurement and efficacy judgments (Paul, 2017).

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Furthermore, in discussions on both models of governance and economic development, it is important to acknowledge the views of Horowitz (1966) and World Bank (2014) on post-colonial mental models. Their research calls for a rethink in discourse on development, i.e. away from “envisioning modernization along western lines”. Relatedly, it’s important to acknowledge that ethnocentric perspectives may not always represent prevailing development, positive emergent scenarios in emerging markets, successful and “challenger” firms or disruptive business models finding traction in advanced economies. These and contemporary challenges to economic growth should be explored in greater depth with a call for further research in certain segments and a call to reexamine emerging ontology on African Development. From a research Philosophy, a review of epistemology and ontology regarding governance in Africa is also necessary. The emerging perspectives are used to challenge where existing meanings have been derived from and ultimately to advocate for a focus on descriptive relativism where readers, researchers and practitioners can appreciate different ways of understanding the world/different epistemological viewpoints particularly where a blanket, singular, western or ethnocentric view of Africa exists (Gibson, 2017; Gordon, 1990; Higgs, 2010). Similarly, it is also important to consider new social and contextual debates in sustainable development in Africa. Indeed, authors such as Keita (2011) have revealed the prevalence of time-tested assertions and recommendations for sustainable development, which to date haven’t brought any lasting change and haven’t changed the view of Africa, governance or corruption. The very language on governance and corruption is also sometimes limited to emerging market views devoid of western/eastern synonyms applied to the developed world, e.g. the use of lobbying, “legalized bribery” or gifts (Fletcher and Herrmann, 2016; OECD, 2009; Soyaltin, 2015). Gibson (2017) asserts that there should be an acceptance that people operate within different frameworks of meaning, cultural frameworks or epistemes. This he contends also extends to linguistic relativism – made popular by authors such as Benjamin Whorf (1956) who argued that language shapes the way people think and view the world. He thus advocates for a dynamic flexible embracing of the ambiguity and dynamic nature of new meaning, particularly in postmodernism, instead of trying to “fix” meaning into particular perspectives. He goes on, however, to call for a focus on gaining knowledge of people’s realities and within the “spirit of empiricism”, using evidence to judge fitness for purpose, i.e. understand and improve the world.

Impact on learning, shared mental models and the knowledge based economy Relatedly, a prominent facet of development discourse is on shared mental models, with key authors pulling from the seminal and widely cited article by Arthur T. Denzau and Douglas C. North (1994). Globally, this has included the

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World Bank and other authors who have called for a focus on the “importance of ideas and causal beliefs in international development”. Relatedly, various authors and institutions have written about the importance of the knowledge based economy. Many have focused on two relevant perspectives. Global perspectives have included views vastly based on comparative international analysis of socio-economic development (Stiglitz, 1999b, 2002), Organisation for Economic Cooperation and Development (OECD, 2015) and perspectives on governance and national policies on growth and development (Stiglitz, 1999a). Within this model, nation states operating in the globalized economy have access to sharing and learning from best practice and applying this to enable their own strategic development. In particular, African states like Kenya can both contribute to and learn from best practice and embed their own governance mechanisms to ensure that national and eventual global competitive targets are met. This can be done within an indigenous etymological and independent perspective. As Colins puts it, it has been “evolution from colonization to independence and the knowledge economy” (Collins, 2013).

Kenya rising? Contextual perspectives on governance and development Out of the countries singled out in the Africa rising narrative, Kenya has been severally mentioned owing to some of the factors mentioned above (also see Figures 7.1–7.3). Moreover, Kenya has recently also been the subject of seminal research as the next frontier economy with great developmental significance beyond the historical geopolitical and economic constructs. The country is still seen as a stable economic powerhouse in a dynamic regional and continental environment (Drummond et al., 2014; Kempe Ronald Hope, 2012; Mahajan, 2009; Taylor, 2014). As mentioned above, in order to achieve the promise of Africa rising and future development and safeguarding set strategic targets for growth and competitiveness, with a focus on realizing the positive influence of key development indicators, it would be important to look into the governance within the region. Kenya’s perspectives can be deemed not to be drawn from a singular paradigm but bears evidence of emergent enabler perspectives drawn from state power outwards and inwards in ensuring strategic development within the country. This is consistent with related theories on the role of the state in governance and development. Kenya’s vision 2030 provides an illustration of governance drawn from the confluence of the power outwards paradigm of movement, i.e. the power of the state towards global markets, multinational corporations, supra-national state organizations and global organizations as well as power inwards towards devolved functions and the enabler paradigm.

Perspectives on governance and development

FIGURE 7.3

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Vision 2030

From the above, this chapter shall draw on the overarching enabler paradigm and the role of state and will seek to challenge prevailing ontology and discourse on development in Kenya. It shall explore multifaceted lenses on the role of the state in governance towards sustainable development and will then delve into exploring key perspectives within the sustainable development paradigm in the Kenyan context and its identified challenges within the remit. This is consistent with the role of the state and enabler paradigm that advocates for the need for cohesive national governance that creates policies and institutions that promote growth and reduce the negative effects of existing or foreseen challenges to strategic growth ambitions at state level.

Indicators and enablers: a stakeholder perspective On a national scale, Kenya’s aspirations for development and governance to ensure the national and global Sustainable and Millennium Development aspirations has led to a lot of strategic and policy based reforms. Key within this is Kenya’s vision 2030 strategy which is: “A globally competitive and prosperous nation with a high quality of life by 2030.” Since it implemented the first Medium Term Plan (MTP 2008–2012), it initially experienced an overall growth rate drop within the medium term but has since been seen to be rising overall by at least 5% (Republic of Kenya, 2008). Its key pillars have included. 1. 2.

Economic To maintain a sustained economic growth of 10% p.a. over the next 25 years Social A just and cohesive society enjoying equitable social development in a clean and secure environment

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Political governance An issue-based, people-centered, result-oriented, and accountable democratic political system.

Constituent targets and indicators of the pillars of the vision include: macroeconomic stability; continuity in governance reforms; enhanced equity and wealth creation opportunities for the poor. Details are in Figure 7.3. The outcomes of progress towards meeting the vision 2030 can be viewed through indicators and enablers in sustainable development and the roles played by governance stakeholders as well as their specific development outcomes and details as provided in the Figure 7.1 country report chart. One positive illustration of this progress that bears evidence of the power outward paradigm is public sector reforms by decentralized agencies, i.e. the Kenya School of Government, the Ministry of Devolution and Planning and the Vision 2030 Delivery Secretariat; with the aim of working towards enhanced quality and efficiency of public service delivery, strengthening management systems and processes in Government and enhancing the capability of public service leadership and management. These reforms have seen some notable progress in development of centralized investment centers, decentralized government services, digital registrations of online citizen payment platforms, performance contracting for national and county government etc. (Vison 2030, 2016). Other illustrations are from the medium term plan (MTP) sector working groups that have seen the meeting of specific prioritized development outcomes in Tourism, Agriculture, Manufacturing, ICT, Financial Services, Infrastructure, Education, Science and Technology, Health, Population, Urbanization and Housing, Labor and wider Governance, Judiciary, Security and Rule of Law Sectors. This has also produced the Second Medium Term Plans Flagship Project that focuses on thematic areas, i.e. Employment Creation, Food and Physical Security, Value Systems and Climate Change. Anticipated growth and development from strategic plans are not devoid of challenges in emerging economies, many of which have been elaborated by various authors. In particular, authors on the Kenyan experience have focused on: Demography and socio-economic development issues – population, labor and employment, poverty, inequality, HIV/Aids, youth empowerment, education and employment, access and quality of education Trade, innovation and finance – external trade, access to public finance and innovation, remittance from diaspora, institutional capacity and stability – banks, capital markets, fiscal, monetary and capital mobility policies Specific sector growth – agricultural growth, growth of the secondary sector – manufacturing, tertiary industrial development Governance and rule of law – corruption and development, decentralization and local governance, public sector management and reform, policy led

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initiatives towards sustainability – PPP, private enterprise, infrastructure development, urbanization, property rights and land, democracy, state capability, good governance and the rule of law. Overall, corruption was ranked as one of the biggest and most recurring challenges to doing business in Kenya by the World Bank in 2007. This is despite ranked improvements from 2003 (that were also corroborated by the Transparency International Corruption Perception Index). With 70% of firms confirming this as their chief constraint and others claiming it to be a normal way of life, three-quarters having participated in related payments, the corruption levels in Kenya have been widely documented and even compared at global scale (currently ranked 145/176) (Adam, Collier and Ndung’u, 2010; Transparency International, 2018). Relatedly, Kenya’s vision 2030 secretariat has also in its second MTP singled out governance issues as key to meeting the sustainable development targets. It has identified “National Values and Ethics” and Rule of Law as some of the cornerstones of overall development. It is therefore entrenched as one of the “Foundations of the Economy and Society” and has wide implications for other themes in security, poverty, service delivery as well as the economic and social pillars.1 The progress herein as mentioned previously provides a more salient “enabler” state view in response to the forces of globalization. This is consistent with the emergent perspective in Kenya illustrated by proponents of the role of the state view, and the contextualized Africa rising and global south–south development narrative.

Whose mandate? Governance, corruption and the role of state agencies From an institutional perspective, in Kenya, the three arms of government that oversee state led governance and constituent institutions fall under the remit of the judiciary, legislative, or/and executive. Within the economic survey of Kenya, the key institutions that are identified in playing key roles in reducing corruption are the Ethics and Anticorruption Commission, the judiciary and the prisons service and the Kenya police service. Incongruously, it is these very institutions that have come under intense scrutiny as key institutional contributors to corruption (Kempe Ronald Hope, 2012) From the government’s perspective, as previously mentioned, this has spurred on further reforms issued by the Government in order to meet the strategic vision. For the police, this has included surveillance and vetting of police officers, and counter corruption strategies. However, challenges still abound, especially in regard to capacity within the institutions, institutional pluralism and stratified responses to strategic state led interventions and recurring trends of offending. Key trends identified have included crime and informal payments that are still key deterrents to

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doing business in Kenya with 59% of respondents to a 2007 survey rating this as a major constraint (Adam, Collier and Ndung’u, 2010; Kempe Ronald Hope, 2012). Overall, indicators of trends in corruption need closer investigation, as decreasing incidents in the quantity of reported violations were for the most part recorded in theft of stock and robbery, and corruption cases remain one of the least reported offences to the police. Capacity management for agencies tasked with reducing corruption is still seen to be an issue. In the judiciary, the amount of documented cases filed in law courts diminished by 37.1% from 359,946 in 2015 to 226,554 in 2016. The quantity of cases determined declined by 29.8% to 191,386. Nevertheless, pending cases increased from 463,152 in 2015 to 498,320 in 2016. This was partly attributed to sustained implementation of non-custodial policy aimed at decongesting the prisons. Corruption cases under scrutiny increased by 40.4% from 2,747 in 2014/15 to 3,856 in 2015/16. In the survey, the aggregate number of cases that the Ethics and AntiCorruption Commission (EACC) handled increased from 5,660 in 2014/15 to 7,929 in 2015/16. The estimation of resources traced stood at KSh 3.6 billion, those recovered by the commission in 2015/16 added up to KSh 420.6 million contrasted with KSh 140.3 million in 2014/15. In the audit time frame, EACC likewise recovered lost resources estimated at KSh 2.6 billion (Table 7.1). The total number of corruption cases forwarded for prosecution increased from 117 in 2014/15 to 167 in 2015/16. There is evidence of some action being taken although this may not be seen to be representative of the true representative sample of the prevalence of the actual vice according to some authors who also stipulate that vast amounts remain unreported.

TABLE 7.1 Public assets traced, recovered and loss averted by EACC, 2010/11 – 2014/15

KSh Million Period 2011/12 2012/13 2013/14 2014/15 2015/16*

Value of public assets traced

Value of public assets recovered

Loss averteda

126.5 16,380.0 7,214.0 3,669.6 3,614.1

41.2 567.4 2,068.0 140.3 420.6

1,208.2 55,016.5 5,600.0 1,600.0 2,600.0

Source: Ethics and Anti-Corruption Commission (EACC) * Provisional a Loss averted refers to total value of public assets where an attempted illegal acquisition was detected and foiled through pre-emptive investigation by the EACC (Kenya National Bureau of Statistics 2017)

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The challenge of capacity and resource allocation is also identified despite reforms to improve the number of magistrates, judges and practicing lawyers within the same period. Overall, this trend spells for an examination beyond the challenge in capacity at state and institutional level. Although corruption remains rife at this level, it isn’t limited to officials at the top and also applies to the private sector and calls for more research. Within the private sector, corruption is still “a fact of life”. A report on the manufacturing sector by the World Bank revealed 75% of those surveyed had participated in corrupt transactions. Those that got government contracts paid 14.2% of the value; often times, bureaucratic regimes (Kimuyu, 2007). As a whole, corruption in Kenya is viewed as endemic and pervasive in all sectors and most constituent institutions, with most authors pointing at bad governance as the cause (Kempe Ronald Hope, 2012). Due to this prevalence and less transparency and publication, efforts to curtail the endemic trend are often less appreciated, often leading to the entrenched perspective of poor governance and corruption. Efforts have included strengthening key governance institutions and the rule of law, establishment of the Anti-corruption Authority, reduction in bureaucratic rent seeking bottlenecks, curtailing historical political collusive behavior and curtailing state and presidential supremacy over civil society (Hope, 2014). Many of these efforts have involved global institutions and best practice sharing, e.g. World Bank’s monitoring of the reforms in the rule of law that led to removal of corrupt judges and strengthening of checks and balances that led to increased national and global optimism on Kenya’s improved governance (Arbache et al., 2010). Others have included both state led and global advocacy, learning and benchmarking with government sector workshops, peer reviews within the African Union, New Partnership for Africa’s Development (NEPAD), East African Community (EAC) and political and institutional transformational leadership (Adam, Collier and Ndung’u, 2010; Hassan, 2004; Kempe Ronald Hope, 2012). The poor perception persists with an increase in scandals in the press, political power seeking, global revelations, e.g. via WikiLeaks, and the continued poor ranking on the Transparency International Index. Moreover, most fingers have been pointed at the government itself, with law makers severally accused of being law breakers with government transactions, even within parliament where incidences of bribery have been recorded (Kempe Ronald Hope, 2012). Many incidences, however, remain unreported and sometimes cannot even be recognized, e.g. non-monetary bribes in the service sector and prevalent perceptions of kleptocratic political “eating” phases. Additionally, looking beyond institutional perspectives, it is also good to contrast these with outcomes of the Citizen Perceptions Index of Corruption. Ultimately, corruption caused by poor governance, if left unchecked leads to more poor governance and leads to further weakened institutions, lack of

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funding for strategic development goals and projects (both through national governments and development partners) and remains the largest barrier to doing business (WEF, 2008). Overall, many recommendations have been put forward to curtail corruption and breed good governance in Kenya. These include further legal reforms (including reviews of the Ant-Corruption and Crimes Act), strengthening and widening the remit and powers of the Anti-Corruption Commission (e.g. on enforcement within wealth declarations) and the ombudsman, public procurement transparency, enhancing the view of punishment as a deterrent, salary reviews of police officers, and a return to the constitution’s ideals. Ultimately, institutional measures including a review of institutional pluralism are recommended with a collective review of cohesive working between state agencies, e.g. old and new police, judiciary, Department of Governance and Ethics, various government cabinet offices, Public Prosecution, Anti-Corruption Commission, etc. (Hassan, 2004; Kempe Ronald Hope, 2012). Additionally, at institutional level, this calls for wider perspectives with the need for greater goodwill and strategic and value based definitions, transformational leadership, legal developments and the increased need to create awareness, learn from global best practice, share the accomplishments of various institutions and advocate for clearer representation of efforts being taken to curtail the vice, and challenges and proposed remedies (Adam, Collier and Ndung’u, 2010; Hassan, 2004).

Conclusions The chapter called for a measured, more researched approach to the application of global governance for sustainable development, particularly when viewed through the role of global governance, global transnational institutions, national governments, institutional (including in pedagogy, research and contemporary practice) and even socio-cultural and individual perspectives. Moreover, it highlights the importance of participation in the knowledge based economy, involvement of stakeholders and seeking and dissemination of empirical data to inform policies and development aspirations and gaps in order to face the challenges towards growth aspirations. It identified room for further research on the ontology on governance and corruption (e.g. causes, individual perspectives, and institutional responses), the theory of the role of the state in economic development, and the efficacy of policy based and institutional responses to governance. Additionally, the role of learning, shared mental models and the knowledge based economy has also called for a balanced view of research in this area. Ultimately, it advocates for a dynamic flexible embracing of the ambiguity and dynamic nature of new meaning/gaining knowledge within the “spirit of empiricism”, to better assess the world.

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Note 1 More specifically, the challenges with emerging issues and Challenges identified by the second medium term plan, 2013–2017 include: Lack of strong national identity, negative ethnicity, class disparities, and impunity; Manipulation of political process by abuse of political office by powerful elite; Human rights violations, unequal distribution of resources, discrimination; Corruption, abuse of office and unethical practices. There have been some additional initiatives towards reviewing and strengthening legislative, policy and institutional framework for ethics and integrity including: Strengthening capacity of ethics and anti-corruption agencies; Enhancing investigative capacity of Ethics and Anti-Corruption Commission (EACC) and granting the Commission prosecutorial powers; Enhancement of asset tracking and asset recovery; Establishment of effective accountability mechanisms; Education, sensitization and awareness on corruption, integrity and ethical issues; Mainstreaming preventive measures against corruption; Promoting standards and best practices in ethics, integrity and anti-corruption for state and public officers; Promoting targeted and integrated research, monitoring and evaluation on governance, ethics, anti-corruption and integrity policies, strategies and programs; Enhancement of mechanism for filing, analysis and access to wealth declarations of public officers; Development of the National Ethics and Integrity Policy; Leadership and integrity training, education programs, establishment of a leadership and integrity institute; Development of whistleblower protection legislation; Enacting necessary legislation so that Kenyan companies found guilty of corrupt practices will be liable to have their assets frozen by the courts; and Introducing an automatic freeze on the assets of anyone indicted on corruption charges with appropriate judicial approval (Vision2030, 2016).

References Adam, C.S., Collier, P., and Ndung’u, N. (2010). Kenya: Policies for Prosperity. Oxford: Oxford University Press. Adesida, O. and Karuri-Sebina, G. (2011). “Is Africa the land of the future? It is not a given!” Foresight, 13(3), 3–6. Arbache, J.S., Habyarimana, J. and Molini, V., 2010. Silent and Lethal: How Quiet Corruption Undermines Africa’s Development Efforts (English). Africa Development Indicators. Washington, DC: World Bank Group. Aubrey, H.G. (1951). “The role of the state in economic development.” The American Economic Review, 41(2), Papers and Proceedings of the Sixty-third Annual Meeting of the American Economic Association, 266–273. Business Daily, (2015). World Bank Confirms Kenya’s Lower-Middle Income Status. [online] Business Daily. Available at: www.businessdailyafrica.com/news/World-Bank-confirmsKenya-lower-middle-income-status/539546-2773210-qs1wquz/index.html [Accessed 4 Nov. 2018]. Carothers, T. and de Gramont, D. (2011). Aiding Governance in Developing Countries: Progress amid Uncertainties. Washington, DC: Carnegie Endowment for International Peace. Collins, C.S. (2013). “An overview of African higher education and development”, in Alexander W. Wiseman and Charl C. Wolhuter, eds. The Development of Higher Education in Africa: Prospects and Challenges (International Perspectives on Education and Society, Volume 21). Bingley, UK: Emerald Group Publishing Limited, 21–65. Denzau, A.T. and North, D.C. (1994). “Shared Mental Models:Ideologies and Institutions.” Kyklos, 47(1), 3–31.

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Newman, J. (2006). Modernising Governance. London: Sage. Obeng-Odoom, F. (2014). “Africa: On the rise, but to where?” Forum for Social Economics, 44(3), 234–250. ODI, (2006). States and Economic Development: What Role? What Risks? Event: Overseas Development Institute (ODI). Available from: www.odi.org/events/167-stateseconomic-development-role-risks [Accessed 4/2/2015]. OECD, (1996). The knowledge-based economy organisation for economic co-operation and development. Paris: Organisation for Economic Co-operation and Development. Available at: www.oecd.org/sti/sci-tech/1913021.pdf [Accessed 8 September 2018]. OECD, (2009). Lobbyists, Governments and Public Trust, Volume 1: Increasing Transparency through Legislation. Paris: OECD Publishing. OECD. (2012). OECD Skills Strategy. Better Skills, Better Jobs, Better Lives: A Strategic Approach to Skills Policies. Available from: http://skills.oecd.org/documents/oecdskills strategy.html [2015, 1/2/2015]. OECD, (2015). A-Strategic-Approach-to-Education-and Skills-Policies-for-the-United-ArabEmirates.pdf. Available from: www.oecd.org/countries/unitedarabemirates/A-StrategicApproach-to-Education-andSkills-Policies-for-the-United-Arab-Emirates.pdf [2015, 3/ 2/2015]. Paul, B. (2017). International Development: A Global Perspective on Theory and Practice. RMIT University Ravi Roy, Southern Utah University. Other Titles in: Development Studies International Development International Studies May 2017, 320 pages. London: SAGE Publications. Republic of Kenya (2011). Final Report of the Task Force on Devolved Government – Volume I: A Report on the Implementation of Devolved Government in Kenya. Republic of Kenya. Rodrik, D. (2008). “Second-best institutions.” American Economic Review, 98(2), 100–104. Sehoole, M. and Knight, J. (2013). Internationalisation of African Higher Education. Rotterdam: Sense. Soyaltin, D. (2015). “Political corruption in comparative perspective: Sources, status and prospects” by Charles Funderburk (ed.). Farnham, UK: Ashgate, Political Studies Review, 13, 111–112. Spicer, A. (2016). The knowledge economy is a myth. We don’t need more universities to feed it. The Guardian, 19 July. Available at: www.theguardian.com/com mentisfree/2016/may/18/knowledge-economy-myth-more-universities-degree [Accessed 8 September 2018]. Stevenson, H. and Dryzek, J.S. (2014). Democratizing Global Climate Governance. Cambridge, UK and New York: Cambridge University Press. Stiftung B. (2018) BTI 2018 Country Report — Kenya. Gütersloh: Bertelsmann Stiftung. Stiglitz, J. (1999a). Public Policy for a Knowledge Economy. London: Remarks at the Department for Trade and Industry and Center for Economic Policy Research, 27 January. Stiglitz, J. (1999b). Knowledge as a Global Public Good. September. Available at: www.world bank.org/knowledge/chiefecon/index2.htm. Stiglitz, J. (2002). Globalization and Its Discontents. London: Allen Lane. Stiglitz, J. (2003). Globalization and Its Discontents. New York: W.W. Norton. 4. Sundaram, J. and Chowdhury, A. (2013). Is Good Governance Good for Development?. New York: United Nations Series on Development, United Nations Department of Economic and Social Affairs. Tabellini, G. (2005). “The role of the state in economic development.” Kyklos, 58(2), 283–303.

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Taylor, I. (2014). Africa Rising? Woodbridge: James Currey. Transparency International, (2018). Transparency International - Kenya. [online] Transparency.org. Available at: www.transparency.org/country/KEN [Accessed 15 January 2018]. Transparency International (2019). Kenya. [online] Transparency.org. Available at: www. transparency.org/country/KEN#. [Accessed 1 October 2018]. UNDP, (2018). Sustainable Development Goals. [online] Available at: www.undp.org/con tent/undp/en/home/sustainable-development-goals.html [Accessed 15 January 2018]. Vision 2030, (2016). Progress (2016 March): Public Sector Reforms. [online] Vision 2030. Available at: https://vision2030.go.ke/progress-2016-march-public-sector-reforms/ [Accessed 4 November 2018]. Waldbrook, N., Rosenberg, M.W., and Brual, J. (2013). “Challenging the myth of apocalyptic aging at the local level of governance in Ontario.” Can. Geogr., 57, 413–430. Whorf, B.L. (1956). Language, Thought, and Reality, ed. John B. Carroll, 276–277. Cambridge, MA: MIT Press World Bank, 2014. Overview: World Development Report. Washington, DC: World Bank Group. World Bank, (2016). Economic Memorandum: Kenya’s Growth Story: Past, Present and Future. [online] World Bank. Available at: www.worldbank.org/en/country/kenya/publica tion/kenya-economic-memorandum-from-economic-growth-jobs-shared-prosperity [Accessed 4 November 2018]. World Economic Forum, (2008). The Global Competitiveness Report 2008–2009. [online] Available at: www.weforum.org/reports/global-competitiveness-report-2008-2009 [Accessed 15 January 2018].

8 DEMOCRACY, SUSTAINABILITY, AND ECONOMIC GROWTH The case of Bangladesh’s garment industry Krish Sahai and Stefania Paladini ii

Democracy, globalisation, and sustainability in an export-led growth: an introduction The linkage between democracy and globalisation on one hand, and democracy and sustainability on another, is well known and has been explored in many contributions, both at academic and political level. Today it would not be possible to discuss the sustainability of economic development of a country without also taking into consideration its political system and its stance toward globalisation and free trade (even when it can prove a problematic approach, especially for emerging economies). The ideals of liberal democracy and globalisation have been on a forward march since the early 1990s. Adoption of the free market economy, during this period, produced unparalleled prosperity for the developed world as well as the global south. It seemed, as Francis Fukuyama saw, that liberal democracy was the only form of governance that could deliver on the political and economic aspirations of the time (Fukuyama, 1992). The relentless progress of free market ideals and democracy captured the imagination of contemporary scholars (e.g. Acemoglu et al., 2001, 2002; Glaeser and Shleifer, 2002, 2003; Kurtz and Schrank, 2007; La Porta et al., 1997; Rodrik, 2001; Rodrik et al., 2004) who dedicated a plethora of literature exploring, explaining and commenting on the role of liberal governance on trade and economic growth. The resonating theme of such literature was the positive impact of liberal democracy on growth. Nevertheless, recently there has been a re-emergence of conservative politics. Anti-globalisation is getting popular consent in western countries where the

i ii

Birmingham City University, the UK Birmingham City University, the UK

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ideas of connectivity and liberalism were pioneered in the first place. In addition, rule of the ‘strong leader’ and ‘managed democracy’ for the sake of stability have replaced inclusive politics in countries that are increasingly becoming more important in the new geo-politics led by China in much of the global south. In its effort to establish an alternative centre of geo-politics beside the Euro-American one, China is investing heavily in developing countries such as Bangladesh. However, the presence of a democratic system seems also crucial for establishing sustainable economic growth, that is, one respectful of the limit imposed by savvy environmental development and respect for the principles of sustainability. Agenda 21, a UN document adopted at the UN Conference on Environment and Development in 1992, clearly states in Chapter 2 that ‘progress towards democratic government’ (UNDESA, United Nations, 2009) is a necessary condition for sustainable development. Considering that Agenda 21 is ‘a comprehensive plan of action to be taken globally, nationally and locally by organisations of the United Nations System, Governments, and Major Groups in every area with human impacts on the environment’ (United Nations Department of Economic and Social Affairs [UNDESA], 2009), the importance of the statement is immediately evident. There is abundant literature in agreement with this position. Söderbaum believes that democracy, promoting transparence and good governance, also strengthens the perspective for sustainable development (Söderbaum, 2006), results not easily achievable in a non-democratic environment (Spiess, 2008). Moreover, if democracy is an essential component for sustainable development, literature is in agreement that the reverse process can happen, too; this is why Dryzek argues that sustainable development is ‘conducive to democracy’ since it strengthens the role of civil society (Dryzek, 1999: 37). However, the linkage is less strict and the interaction far more complex than it might seem. As Rand (2014) observed, The seemingly inextricable link between democracy and sustainable development is flawed because it cannot account for the countries in which authoritarian governments have pursued and promoted sustainable development. For example, in a comparison of the top six democracies and the six strictest authoritarian states, ranked by the Economist Intelligence Unit, the authoritarian regimes have a greater average ecological reserve. This implies that authoritarian states do not necessarily live in a less ecologically sustainable manner. (Rand, 2014: 5) A more nuanced approach to the whole subject is probably needed to better understand the complex mechanisms linking democracy, sustainable development, and economic growth, as the case study presented in this chapter illustrates.

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Bangladesh is well known in the world as one of the leading suppliers in the garment industry, ranking just after China and the EU for exports (US$ 28 billion in 2018). Even more importantly, more than 80% of the whole country’s export revenue is generated from clothing trading, and it has been growing. The industry comprised in 2018 about four thousand factories and employed approximately four million people, of which 70% were women, adding a dimension of gender and empowerment to the sustainability framework in the country. As a matter of fact, by creating new opportunities for paid employment, the clothing industry liberated Bangladeshi women who had been stuck in unpaid labour for centuries. Therefore, the clothing industry is one of the most significant success factors that have supported the Bangladeshi government in delivering its sustainable development goals (SDGs). Moreover, due to some notable accidents in the workplace – such as Rana Plaza in Dhaka in 2013 with its many fatalities – work standards and measures for enhancing sustainability in manufacturing have been rapidly adopted. As a result, the clothing industry is largely credited for the improvements Bangladesh has achieved. However, the influence of different development methods lingers. China’s success in economic development, for one, looks iconic to Bangladesh, and the mantra of ‘less democracy, more development’ has become highly popular in the country. There is also empirical support for the authoritarian regime’s success in economic development (Chan, 2002). Other Southeast Asian countries, i.e. Singapore, South Korea and Taiwan, also started their journey of economic growth with authoritarian regimes that prioritised growth over democracy. Blessed with highly efficient and honest bureaucracies they maintained open economy policies to gain from global trade. These governments worked in collaboration with the private sector to promote economic growth. The aim of this chapter is to explore the relationship between democracy and trade growth in developing countries, using Bangladesh’s clothing industry as a case study. The chapter is in four sections. The first section critiques the prevalent assumptions on the relationship between democracy and trade performance. The applied methodology is outlined in the second section. The model and the results are discussed in the following sections, together with the conclusions.

Democracy and trade The governance-growth literature assumes that democracy is the only regime type that offers voice and accountability to citizens, and promotes democracy as a must for economic growth. It seems intuitive that states are more likely to pursue policies that promote trade and social welfare if the public demand is strong. Feng (1997) argues that democracy positively affects growth by reducing the likelihood of regime interruption and enhancing adjustability of the political system. Democracy generates a favourable social condition for economic growth through political and economic freedom that leads to efficiency in property rights and market

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competition as well. Feng further argues that the combination of macro political certainty and micro-political adjustability creates a conducive environment for long-term economic growth and trade expansion. Earlier work of Riker and Weimer (1993) corresponds to Feng’s claim. Sirowy and Inkeles (1990) argue, however, that democracy hinders growth in the least developed countries. Their argument is based on the impact of dysfunctional consequences of premature democracies. Reflecting on the historical evolutionary context of democracy in the less developed and developing world they argue that democracy has failed to implement the necessary policies for rapid economic growth and remained unsuccessful in promoting states’ involvement in the development process. The impact of democracy on development and trade seems logical but not well documented, and empirical works yielded ambiguous results due to technical and measurement obstacles. Table 8.1 illustrates a few examples of such

TABLE 8.1 Demonstrates the conditions, and impacts of democracy on international trade

Conditions

Impacts

Source

Democracy

Reduces the likelihood of regime interruption. Flexibility for major government change within the existing political system. Creates a conducive environment for long-term economic growth and trade expansion. The weakness of new democracy in policy implementation. Democracy facilitate liberal trade policies. Less democratic countries tend to export more non-manufactured goods. Autocratic countries may opt for protectionism. Democracies sometimes replace transparent trade barriers with obscure ones.The reduction of tariff-based trade barriers by democratic regimes is much more evidenced compared to the reduction of non-tariff based barriers. Democracy enhances adjustability of the political system.

Feng (1997)

Responsiveness

Policy obfuscation Selectorate Time horizon

Form of government

Parliament

Feng (1997)

Adam et al. (2011)

Sirowy and Inkeles (1990) Kono (2006), Milner and Kubota (2005) Méon and Sekkat (2008)

Milner and Kubota (2005), Nielson (2003) Kono (2006), Magee et al. (1989)

Campos and Nugent (2002), Feng (1997)

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141

works. Przeworski and Limongi (1993) suggest that the cause of theoretical ambiguity is the use of the perception of the secure property rights concept to explain the positive impact of democracy on trade and development. They also highlight that much of the literature on democracy fails to evidence how democracy makes arbitrary confiscation of property comparatively more challenging than the non-democratic regime. Keefer (2004) also summarises that there is no agreed indicator of voice or accountability in theoretical or empirical literature. Most studies use a range of proxies such as political freedoms, civil liberties, citizens’ participation in government selection, and freedom of speech or structural indicators of democracy as a measure for voice or accountability. The anomalies in democracy and trade relationships are further enhanced by the recent economic growth achieved by India and China (Milner and Kubota, 2005). India has been a democracy since its independence from Britain, but trade liberalisation did not happen until the 1990s. Therefore, no single variable can account for the dramatic changes in economic policies in the developing world. The unprecedented democratisation and liberalisation experienced in developing countries in the recent past is perhaps the result of variations in the domestic political institution. By allowing private firms to compete in market countries such as China and India, they have managed to gain substantial economic growth (Keefer, 2006). Bangladesh shared its socio-cultural and political roots with India and started liberalising fairly soon after independence. The promarket military governments in Bangladesh reduced state monopoly by allowing market-based competition. Therefore, from the Sino-India example, it is logical to infer that Bangladesh will likely see similar growth with continued democracy and liberal policies. The available literature dealing with democracy and its impact on trade mostly studies democracy as an impetus for liberal trade policies instead of studying how it contributes to trade performance. Two notable works on democracy and trade policy, Kono (2006) and Milner and Kubota (2005), argue that democratic regimes have more liberal trade policies than nondemocratic regimes. Kono (2006) applied the principal–agent model to reason why democracies have more liberal trade policies and argue that in democratic regimes the principal is the voters and the agent is the politicians. Kono claims that voters who are principals and consumers at the same point in time prefer liberal trade policies that lower prices and raise real income. Political agents in democracies need voters to cast their vote in their support to get into power and stay in power. Therefore, the intuitive argument is that the political competition for votes should drive democratic leaders towards liberal trade policies. Kono (2006: 369) proposes that democracy promotes trade liberalisation because of three logically connected reasons: i) all governments are responsive to interest-group demands in some degree, ii) mass population demands more liberal trade policies than small numbers of interest-groups, and

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iii) the democratic governments are inherently much more sensitive to popular demand of mass people compared to undemocratic ones. However, this does not necessarily mean that particular interest groups always want protectionist trade policies whereas mass populations want completely free trade. Nonetheless, Herrmann et al. (2001) and Baker (2003) empirically and theoretically support the notion that mass populations from both developed and developing countries prefer liberal trade policies. The beneficial outcome of liberalisation on price, quality and variety of consumer goods outweighs the risk of job losses through trade liberalisation. Therefore, trade policy preferences in developing countries are somewhat based on the commodity consumption opportunity. The evidence that democracy reduces tariff barriers is beyond any contradiction (Kono, 2006; Milner and Kubota, 2005; Nielson, 2003). Also, democracy indirectly but positively enhances economic growth and trade prospects by investing in education and skill development for human capital accumulation (Alesina and Perotti, 1996; Glaeser et al., 2004; Gyimah-Brempong and De Camacho, 1998; Helliwell, 1994; Mauro, 1995; Perotti, 1996). The impact of democracy on trade has some interesting aspects to it too, as Méon and Sekkat (2008: 15) note, stating that less democratic countries tend to export more nonmanufactured goods. However, they have not found any impact of democracy on manufactured goods export which emphasises the difference between trade in manufactured and non-manufactured goods. The impact of democracy may not affect all industries in the same way. The democracy–trade studies indicate that democracy’s impacts are of secondary importance for the industries with endowment based comparative advantage. Autocratic political leaders from developing countries may opt for protectionism. In order to explain such behaviour of non-democratic regimes, Milner and Kubota (2005: 13) conceptualise the selectorate group opposing the electorate. The selectorate is a capital-rich elite segment of the population who benefit from the trade barriers imposed upon capital-intensive imports. Trade barriers on capital-intensive imports actively redistribute wealth from those outside the ‘selectorate’ group to those within the ‘selectorate’. Nielson (2003) also indicates similar explanation of protectionism but the focus is more on the size of the electoral district instead of capital rich elites. Disaggregating democratic regime types into the presidential and nonpresidential forms he further evidences that developing countries with strong presidential government are more efficient in promoting liberal trade policies. According to Kono (2006), democracy’s influence on trade liberalisation is not clear. He argues that democracies replace transparent trade barriers with obscure ones to favour the capital rich elites. His obscure trade barrier concept is based on the ‘optimal obfuscation’ principle of Magee et al. (1989: 134). They suggest that a political party usually shifts to more indirect income redistribution policies when the electoral gains from voter obfuscation outweigh the electoral

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cost of weaker clientelistic support. The ‘optimal obfuscation’ principle explains the reverse-efficiency ordering of trade policies adopted by some advanced western democracies. In light of this, the asymmetric effect of democracy in trade liberalisation is acceptable, and it is not possible to strongly argue that democracy reduces trade barriers. The empirical analysis contained in this chapter uses Bangladesh’s clothing industry as a case study to test the hypotheses of the linkage between democracy and economic growth and, more specifically, to investigate the role of democracy in promoting trade and to what extent.

Model specification The model adopted here is a standard trade gravity model. A large body of literature, e.g. Blomberg and Hess (2006), De Jong and Bogmans (2011), De Groot et al. (2004), Djankov et al. (2010), Kox and Nordas (2007), Mirza and Verdier (2008), tested the impact of governance on trade using various forms of the gravity models. The trade gravity model states that the bilateral trade between any two countries is proportional to the product of their GDPs and diminishes with distance when other things are equal. A general gravity model in its multiplicative form is estimated as follows: Ti j ¼ A X

Yi x Yj Di j

ð1Þ

Where A is a constant term, Ti j is the value of trade between country i and country j, Yi is the GDP of country i, and Yj is the GDP of country j, and Di j is the distance between country pairs (Krugman et al., 2012: 43). The methodological rigour is ensured by adopting the theoretical gravity model (Anderson, 1979; Anderson and Van Wincoop, 2003) and the empirical state of the art. The specified model for this study takes the form as demonstrated in equation 2. The logarithmic form of the model is adopted to obtain a roughly linear relationship between the trade value and explanatory variables and to stabilise the variations (Montgomery et al., 2012). The subscript i denotes the cross-sectional unit (145 countries), and the subscript t refers to the time unit (year 2000–2015). lvalueit ¼ β0 þ β1 lgdpit þ β2 lbdgdpt þ β3 lpercapit þ β4 lbdpercapt þβ5 ldistancei þ β6 gspi þ β7 inflationit þ β8 contigi þ β9 comlang

ð2Þ

þβ10 colonyi þ β11 democracyit þ β12 bddemocracyt þ εit Where lvalue is the log of clothing trade value between Bangladesh and partners in current US dollars. The independent variables are: log of world GDP (lgdp); log of Bangladesh GDP (lgdpbd); log of world GDP per capita (lpercap); log of

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Bangladesh GDP per capita (lbdpercap); log of distance between trading partners (distance); control for inflationary pressure (inflation). The dummies reflecting whether: there is a preferential trade agreement between Bangladesh and trade partners (gsp); they were member of the same colonial empire (colony); and they share: a common border (contig), a common language (comlang). Our variables of particular interest are: the quality of democracy in Bangladesh (bddemocracy); and in its trading partners (democracy). The last term (εit) is the stochastic error term to capture all the omitted effects on the clothing trade. GDP is the market potential for the world export market and denotes the supply capacity of Bangladesh, to sell clothing to those export markets. GDP positively influences trade, given higher GDP means higher consumption. Higher GDP per capita positively impacts trade by increasing demand for clothing for the importer. For the exporter, it negatively impacts trade as labour costs rise with increasing income. It is also hypothesised that good performance in democratic practice is expected to impact the clothing trade positively. The GSP is expected to positively impact clothing trade as this provides developing countries certain cost advantage in export. The distance variable seems necessary given that the founding principle of trade gravity model is based on the assumption of the diminishing effects of distance on bilateral trade. The Inflation variable is expected to have a negative influence. Contig, comlang and colony are the three dummies included to identify the facilitating or impeding impact of the border, common language and colonial ties. The quantitative data used for this model have been sourced from the World Bank, the Comtrade, and the CEP II databases. Data from all these sources are processed into a panel data set of 16 years from 2000–2015 for 145 countries (Table 8.2). The overall trade value that accounts for both export and import trade is the base model to scrutinise the clothing trade performance, as sourced from the United Nations’ Comtrade database. Data sampling is conducted using the four digits HS 96 coding system to capture data for years 2000–2015. According to the coding system, category 52 to category 63 capture all clothing commodities. A panel data set with 1721 data points has been constructed with data for all variables. This panel data is unbalanced since there are missing data for the dependent and independent variables for some countries for some years (Greenaway et al., 2008: 13). A second data set with 1653 observations for net export has been sampled from the original data set by filtering out import trades. The relevance of distance is in the trade cost term. The geographic distance data is sourced from the CEP II database using kilometre as a unit of measure. The measures of pair distances are conducted between the capital city of Bangladesh (Dhaka) and trade partners’ capital city. The GDP per capita serves as a proxy for wages of the clothing industry’s workforce. GDP per capita is the actual wages of countries (Bergstrand, 1989; Redding and Venables, 2004). Higher GDP per capita (wage) of the importer positively impacts trade by increasing demand for clothing. On the other, hand

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TABLE 8.2 Quantitative data sources, manipulations and units

Data

Manipulation

Source

Units

Trade value

Log of Bangladeshi clothing trade value Log of Bangladeshi clothing export value Log of GDP Log of GDP per capita None

COMTRADE

Current USD

COMTRADE

Current USD

World Bank World Bank World Bank

Current USD Current USD Consumer prices (annual %) Kilometres

Export Trade GDP GDP per cap Inflation Distance Democracy GSP Contig Comlang Colony

Log of bilateral distance 2.5 is added to each data point Binary dummy Binary dummy Binary dummy Binary dummy

CEPII WGI UNCTAD CEPII CEPII CEPII

Perception in a range between ±2.5 0–1 0–1 0–1 0–1

Source: Author’s elaboration on used data sets

higher wage for the exporter (Bangladesh) negatively impacts trade as the cost of production increases (Choudhary, 2015). The GDP per capita data is sourced from the world development indicators (WDI) database of the World Bank. The GDP per capita figures are in current US dollars. The main focus in this paper is on the impact of democracy on export performance, therefore the explanatory variable under scrutiny is democracy and its proxies; here, we use the world governance indicators (WGI) (Kaufmann et al., 2011) to assess the quality of democracy, as reported in estimated scores and ranks. The higher a country performs in the scoring system, the better it performs across these six indicators. Methodologically these indicators are prone to the margin of errors which is taken into consideration in the analysis. The range of the data set is between –2.5 and 2.5 and to avoid negative figures 2.5 is added to each data point, thus estimation values between 0 and 5 are worked out (Oh and Oetzel, 2011: 666). The dummy variables indicate the presence of a common language (comlang), common colonial history (colony) and common land border (contig) and GSP. These dummies effectively control for various socio-political factors and possible measurement errors in the distance variable. Data on these dummies are derived from the CEPII database. Finally, inflation data were gathered from the World Bank’s WDI dataset and used to control for inflationary effects on the GDP, GDP per cap, and trade values, given nominal values for these variables are used for constancy purposes. The descriptive statistics of the data are presented in Tables 8.3 and 8.4.1

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TABLE 8.3 Descriptive statistics

Variables

Obs

Mean

Std. Dev.

Min

Max

value (mn US$) gdp (bn US$) Percap (thousand US$) democracy bdgdp (bn US$) bdpercap (hundred US$) bddemocracy distance (thousand KM) gsp contig comlang colony inflation

1721 1721 1721 1721 1721 1721 1721 1721 1721 1700 1700 1700 1685

185 503 15.24 2.64 100 6.68 2.05 7.73 0.39 0.01 0.00 0.01 6.03

589 1600 19.46 0.95 42.3 2.45 0.12 4.20 0.49 0.10 0.00 0.10 9.15

0.050497 0.172 0.106 0.60 53.4 4.01 1.82 0.14 0.00 0.00 0.00 0.00 -27.63

5780 18000 116.61 4.33 195 12.12 2.22 18.18 1.00 1.00 0.00 1.00 185.29

Source: Author’s elaboration based on panel data analysis results

Results of the model testing At this stage of the analysis, the fundamental questions are how to describe the relationship of the variables within the model, whether those relationships are statically significant; and whether some independent variables are stronger predictors of the dependent variables. For this purpose, regression analyses with several estimators are performed first on the data sets consisting of total trade (lvalue, Table 8.5) and then on the net export data (lexp. Value, Table 8.9). The variable inflation factor (VIF) (Table 8.6) and Breusch-Pagan/CookWeisberg test (Table 8.7) for heteroskedasticity produce expected results of very high mean VIF and presence of heteroscedasticity in the data set. Due to extremely high individual VIFs for variables lbdpercap and lgdpbd, the second is dropped in the following estimations. The decision to drop lgdpbd instead of lbdpercap is based on the fact that the latter serves as the proxy for income earning in this model, which is assumed to predict the influence of low income earning on labour cost in clothing producing countries. The results are significant at 99% confidence level and contained in Table 8.8. GDP positively and significantly affects trade that is in accordance with other gravity models that studied bilateral trade and confirms theoretical expectations. We find that the import of clothing is income elastic: a 1% increase in importers’ GDP raises bilateral trade on average by about 1.12%. Our results also confirm the theoretical expectations about the adverse effects of distance on the intensity of trade. According to the estimates here, a 1% increase in bilateral distance reduces trade proportionately. The adverse effect of distance is important in explaining the patterns of the global clothing trade since it signifies the cost of international

gdp

1.00 0.27 0.17 0.08 0.08 0.02 0.05 0.22 0.04 . 0.11 –0.10

value

1.00 0.76 0.34 0.28 0.16 0.16 0.03 0.07 0.31 0.00 . 0.30 –0.12

Variables

Value Gdp Percap democracy Bdgdp bdpercap bddemocracy Distance Gsp Contig Comlang Colony Inflation

TABLE 8.4 Correlation matrix

1.00 0.59 0.18 0.18 0.04 –0.06 0.54 –0.07 . 0.12 –0.24

percap

1.00 0.03 0.03 0.00 0.24 0.66 0.03 . 0.12 –0.30

democracy

1.00 1.00 0.26 –0.01 0.01 0.00 . 0.00 –0.14

bdgdp

1.00 0.27 –0.01 0.01 0.00 . 0.00 –0.14

bdpercap

1.00 0.02 0.00 0.00 . 0.00 –0.01

bddemocracy

1.00 –0.08 –0.15 . 0.01 0.02

dist.

1.00 –0.08 . 0.12 –0.14

gsp

1.00 . –0.01 –0.01

contig

. . .

comlang

1.00 –0.04

colony

1.00

inflation

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TABLE 8.5 Ordinary least square (OLS) [Equation 3] estimation (P < 0.05)

lvalue

Coef.

Std. Err.

t

P>t

[95% Conf. Interval]

lgdp lgdpbd lpercap lbdpercap ldistance gsp contig comlang colony inflation democracy bddemocracy cons Obs R-squared Adj R-squared

1.122 –6.018 –0.278 8.159 –0.845 0.847 –0.172 0.000 1.076 –0.028 0.328 –0.819 97.693 1664 0.7524 0.7507

0.023 2.581 0.039 3.014 0.059 0.103 0.394 (omitted) 0.364 0.004 0.060 0.345 46.082

47.770 –2.330 –7.210 2.710 –14.300 8.230 –0.440

0.000 0.020 0.000 0.007 0.000 0.000 0.663

1.076 –11.080 –0.354 2.248 –0.961 0.646 –0.944

1.168 –0.956 –0.203 14.070 –0.729 1.049 0.600

2.960 –6.760 5.420 –2.380 2.120

0.003 0.000 0.000 0.018 0.034

0.362 –0.036 0.209 –1.496 7.309

1.790 –0.020 0.446 –0.143 188.078

Source: Author’s elaboration based on panel data analysis results

TABLE 8.6 Variable inflation factor (VIF) Matrix

Variable

VIF

1/VIF

lbdpercap lgdpbd lpercap democracy gsp lgdp bddemocracy ldistance contig inflation colony Mean VIF

932.29 924.18 3.18 2.76 2.07 1.81 1.44 1.25 1.22 1.15 1.04 170.22

0.001073 0.001082 0.314843 0.361869 0.484007 0.552367 0.696273 0.801667 0.822758 0.866951 0.962308

Source: Author’s elaboration based on panel data

trade. Within the global value chain of clothing, transportation costs are incurred repetitively as goods-in-process cross several borders. Therefore, small reductions in transport costs can lead to substantial saving in trade cost which in turn increases vertical specialisation even further.

TABLE 8.7 Breusch-Pagan/Cook-Weisberg test for heteroskedasticity

Ho: Constant variance Variables: fitted values of lvalue chi2(1) = 37.14 Prob > chi2 = 0.0000 Source: Author’s elaboration based on panel data

TABLE 8.8 Regression model–total trade

OLS Explanatory Variables lgdp lpercap lbdpercap ldistance gsp colony Contig inflation democracy bddemocracy cons Obs. R-squared Wald chi2(10)

Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err.

ROLS Fixed

Random XTGLS XTGLS

XTGLS

lvalue lvalue

lvalue

lvalue

lvalue

lvalue

lvalue

1 1.12 0.02 –0.29 0.04 1.14 0.11 –0.84 0.06 0.86 0.10 1.08 0.36

3 0.85 0.27

4 1.09 0.06 –0.36 0.08 1.51 0.09 –0.67 0.15 1.42 0.28

5 1.04 0.04 –0.29 0.04 1.34 0.11 –0.83 0.09 0.77 0.15 1.78 0.35

–0.01* 0.00 0.17 0.11 –0.46 0.18 –12.24 1.76 1664 0.74 2185.40

–0.01 0.00 0.27 0.07

6 1.14 0.01 –0.24 0.02 1.12 0.05 –0.97 0.04 0.95 0.07 0.82 0.04 –0.42 0.12 –0.02 0.00 0.35 0.04

7 1.14 0.02 –0.26 0.03 1.13 0.06 –0.89 0.06 1.01 0.12 0.93 0.11 –0.23 0.15 –0.00 0.00 0.32 0.05

–9.16 1.24 1656

–9.87 0.50 1664

–10.94 0.69 1656

–0.03 0.00 0.34 0.06

2 1.14 0.02 –0.23 0.04 1.22 0.10 –0.97 0.06 0.93 0.10 0.84 0.35

–0.03 0.00 0.32 0.06 –0.45* 0.29 –9.74 –9.98 1.00 0.96 1664 1664 0.75 0.78

1.61 0.11

–0.01* 0.00 0.43 0.15 –0.50 0.18 –13.14 4.24 1664 0.53

3252.18 43414.23 20211.45

mean VIF 1.67; p < 0.01, * p < 0.1, **p < 0.05 Notes: GLS (column 5) Control for heteroscedasticity; GLS (column 6) Control for panel specific Autocorrelation; GLS (column 7) control for both heteroskedasticity and Autocorrelation. Source: Author’s elaboration based on panel data analysis results

0.97 0.02 1.14 0.10 –0.49 0.06 1.39 0.10 1.38 0.35 –0.02 0.00 0.12 0.06 –12.11 0.97 1653.00 0.76

OLS

1

0.98 0.02 1.26 0.10 –0.54 0.06 1.46 0.10 1.20 0.34 –0.02 0.00 0.16 0.06 –12.61 0.95 1653.00 0.78

ROLS

2

–12.58 3.97 1653.00 0.58

0.00 0.00

0.66 0.25 1.60 0.10

Fixed

3

–13.50 1.69 1653.00 0.58 2591.69

–0.01 0.00

0.96 0.06 1.53 0.08 –0.52 0.15 1.70 0.26

Random

4

2494.22

0.88 0.03 1.18 0.10 –0.56 0.05 1.14 0.13 2.02 0.37 –0.01 0.00 0.20 0.06 –10.10 0.92 1643.00

XTGLS

5

36804.32

0.99 0.01 1.14 0.05 –0.52 0.04 1.56 0.07 1.13 0.05 –0.02 0.00 0.11 0.04 –12.44 0.52 1653.00

XTGLS

6

15161.23

0.96 0.02 1.11 0.06 –0.57 0.05 1.43 0.12 1.36 0.12 –0.01 0.00 0.24 0.05 –11.58 0.65 1643.00

XTGLS

7

mean VIF 1.65; p< 0.01, *p < 0.1, **p < 0.05 Notes: GLS (column 5) control for heteroscedasticity; GLS (column 6) control for panel specific Autocorrelation; GLS (column 7) control for both heteroskedasticity and Autocorrelation. Source: Author’s elaboration based on panel data analysis results

Obs. R-squared Wald chi2(10)

cons

democracy

inflation

colony

gsp

ldistance

_

Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err. Coeff. Std.Err.

lgdp

lbdpercap

Estimations

Variables

Column ID

TABLE 8.9 Regression model–export trade

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151

Trade-partners’ per capita income expectedly has a negative impact on bilateral trade in clothing with Bangladesh; for customers with higher income generally purchase high-end clothing products instead of low-value products from Bangladesh. However, the per capita income of Bangladesh positively and significantly affects trade, which is in accordance with other gravity models that studied bilateral trade and confirms theoretical expectations. The dummy variables indicate the presence of common colonial history (colony) and common land border (contig). The results (Table 8.8, column 7) show that the contig and colony variables have the expected positive sign often reported in the literature, and are significant at the specified level. The contig dummy captures any measurement error in the distance variable. The results confirm the theoretical expectation of the positive effect of preferential trade facility available for Bangladeshi clothing industry in the form of the generalised system of preference (GSP). Preferential trade agreements (PTA) are known to generally increase bilateral trade between trading nations. In this specific case, through the GSP scheme, PTAs have also allowed Bangladesh to build cost competitiveness to increase its clothing export. The inflation variable captures possible measurement issues caused by the use of nominal values to measure economic mass (i.e. gdp, percap). The result is in line with the theoretical expectation and negatively influences trade. However, the magnitude of the adverse effect is low. The relations between democracy and the clothing trade are of semi-log forms which turn the reported effect sizes semi-elastic. To deal with the semielasticity, we estimate the average trade increase figure using a method outlined by De Groot et al. (2004).2 A performance increase in one standard deviation from the mean for democracy leads to 36% increase in total trade. However, the result for bddemocracy is negative and small in magnitude (–0.05). For export trade, the results are similar to total trade, the standard, control and dummy variables show expected signs and significance except for the lpercap and contig variables as they do not appear significant for export trade. A performance increase in one standard deviation from the mean for democracy leads to 26% increase in export trade for Bangladesh. The bddemocracy variable is not significant for export trade, defying the theoretical expectation. The results suggest a few considerations. The process by which governments are selected, monitored and replaced is critical to creating and sustaining an environment beneficial to businesses. Democratic regimes reduce trade barriers to respond to their citizens’ demands for cheaper and accessible commodities and accountability of the government. The assumption is, democratic practice in Bangladesh will increase clothing trade due to a substantial reduction in trade barriers. The general argument is that democracy positively affects growth by reducing the likelihood of regime interruption and enhancing adjustability of the political system. Democracy stabilises politics by reducing unconstitutional regime change, and also by offering flexibility for major government change within the existing

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political system. The combination of macro political certainty and micro-political adjustability creates a conducive environment for trade expansion. The unexpected lower magnitude demonstrated for Bangladesh in the results is not unique since earlier works on democracy, economic growth and trade yield ambiguous results due to technical and measurement obstacles. The conceptual ambiguity is caused by the use of perception of a secure property rights concept to explain the positive impact of democracy on trade and development, but almost all literature on democracy fails to evidence how democracy makes confiscation comparatively harder than a non-democratic regime. The impact of democracy on the clothing trade has two interesting aspects: first, the indirect effect of democracy may not impact all industries in the same way. Impacts of democracy will be of secondary importance for industries in which comparative advantage is based on endowments. Democracy influences the clothing industry less significantly because it is reliant on the endowment of labour abundance. Second, the impact of democracy on the clothing trade is based on the impetus for liberal trade policies created by this specific regime type. Reflecting on the historical evolutionary context of democracy in Bangladesh it is logical to argue that democracy has been failed by the neo-patrimonial regimes of Bangladesh (Islam, 2013). Dysfunctional democracy failed to adopt the necessary policies for rapid industrial growth and involve the state in the development process. The dysfunctional nature of democracy in Bangladesh explains the negative impact of the democracy variable while the perception of governance within Bangladesh is accounted for (bddemocracy). Results suggest that an increase in democracy of one standard deviation from the mean leads to an estimated 5% decrease in overall trade. The dysfunctional consequences of premature democracies are also evidenced by the earlier review of Sirowy and Inkeles (1990: 128). The negligible positive impact of democracy on trade growth is much more evidenced in the 1970s scholarship (Jackman, 1976; McKinlay and Cohan, 1975;). It is also possible to infer that the clothing trade may not increase simply as a consequence of improvements in democratic qualities in Bangladesh. While Bangladesh is gradually becoming a major player in the clothing trade, it is important to avoid the orthodoxy that better governance in Bangladesh will lead to major improvements in trade. Also, the negative results mean that the virtuous cycle of increased gain from trade to better governance, which in turn supports an even higher increase in trade in the long run, is unrealistic. The positive disciplinary impact of higher trade gains on the institution is a fallacy while dealing with countries such as Bangladesh. But, this does not imply that higher trade will not improve efficacy and accountability in delivering primary services. Rather, it means that those efficacies will only be available at an extra cost in the form of speed/greasing money. Therefore, corruption persists, and corrupt agents continue to reap the benefits of it. The results contradict the general notion of democracy’s influence on trade facilitation through a reduction in trade barriers by showing negative feedback

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(–0.5) for Bangladesh (Table 8.8). The asymmetric effect of democracy on trade is explained by the obscurity of trade policy, suggesting that transparent trade barriers are replaced with obscure ones. The result leads to the assumption that democracy promotes obfuscation through the use of complex policies, which reduces its efficacy in serving the needs of traders. The adverse effect of democracy in Bangladesh also indicates that domestic trade will be relatively more attractive when governance quality improves in Bangladesh. The domestic trade impetus from improved democracy takes us back to the argument that growth and democracy are positively correlated because the demand side of the domestic trade will depend on Bangladeshi people’s growing purchasing power. Domestic consumption in Bangladesh is undergoing a significant shift due to the increased purchasing power of the growing middle class. The proportion of spending on consumer goods has increased substantially in the last few years. The young and upwardly mobile middle class is keen to demonstrate their materialistic success through consumption of higher value commodities, a trend that is expected to grow. With greater access to education, income and connectivity, Bangladeshi people may demand for more civil rights and greater transparency, and, eventually push for a wider inclusivity and more sustainable development.

Concluding remarks As already stated in the introduction, the clothing industry is central, or better to say, critical for Bangladesh’s economic development, even in the sense of a more sustainable growth, and this is why it is so important to study its trends and evolution, especially in terms of governance and shift towards sustainability. This has already begun. Safer work standards in the clothing industry, now increasingly applied in many emerging economies, have been instituted in Bangladesh after a few notable accidents that have become famous in the industry and spearheaded their adoption. And while a direct relationship between sustainability, democracy and trade has not been empirically demonstrated, the preliminary results presented in this chapter suggest nonetheless the existence of a linkage. However, it is a reality that the stakeholders of the clothing industry in Bangladesh seem to support managed democracy arrangements over the liberal form; the expectation of political stability is such that coercive action from government to keep politics stable is not uncommon. Although the lack of accountability and public voice in choosing the government is being criticised everywhere, the trade-off between stability and accountability favours the first. The political psyche of Bangladesh is willing to accept a similar settlement in the hope that it will deliver the necessary stability and momentum for economic growth. Many contemporary liberal democracies first achieved economic growth under a dictatorship and democratised only after a large educated middle class started to dominate political dialogues for democratic transitions. The evidence from the sample studied here demonstrates a consensus that Bangladesh

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needs economic growth much more than anything else. Progressive policies to facilitate economic growth are expected more than democratic regime at this point, in an approach which is ‘economy first, democracy second’. How this will impact the country negatively on its path to sustainable, equitable growth, remains to be seen.

Notes 1 UN Comtrade reports data in current USA dollars. 2 We apply the following computation methods: dðlvalueÞ ¼ coeff :  Std: Dev: Therefore, d(lvalue)/(lvalue) = {exp(coeff. × Std.Dev.)–1}

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PART III

9 WORK TIME AND ENVIRONMENTAL IMPACT IN A GLOBAL PERSPECTIVE Alexandra Arntsen and Bruce Philpi

Introduction The industrial revolution in England, from the late-eighteenth century onwards, was a catalyst for sweeping global change. Indeed, to some extent the problems we experience today, in terms of environmental sustainability, can be traced to this process, as it spread around the world to less developed and developing nations. Although we now recognise the difficulties of the carbon economy, which the industrial revolution ushered in, the industrialisation process facilitated an era of high mass consumption in developed nations. This age of high mass consumption (Rostow 1960) is what an increasing number of contemporary developing nations aspire to achieve. For example, in the latter part of the twentieth century the Asian “Tiger” economies bridged the gap, and in the early part of the twenty-first century the BRICS (Brazil, Russia, India, China, and South Africa) have emerged as important economies, both in per capita and, especially, absolute terms. This has created pressure on the global ecosystem. In recognition of this, the UN (2015) have formulated a number of sustainable development goals and ensuring sustainable consumption and production patterns is a keystone in this strategy. According to the UN, sustainable consumption and production aims at “doing more and better with less” (United Nations 2015). In this chapter, we wish to argue that increases in welfare should not just be achieved through using fewer environmental resources, increased recycling, and reducing pollution, but should also be achieved through reductions in work time and associated consumption of commodities. This is a challenging scenario, however,

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since the development aspirations of (relatively) poor nations creates considerable upward pressure on global consumption. Capitalism, as an economic system, has been an essential component of this historical process which had led to unparalleled rises in per capita income levels. However, it must also be recognised that the raison d’être of capitalist firms is not to maximise the welfare of the world’s citizens. As Adam Smith noted: It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own selfinterest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages. (1982, pp. 26–27, original 1776) Therein lies a challenge for the ongoing viability of capitalism in the context of the present environmental threat. Firms are motivated to sell goods and services for profit; while this can have beneficial consequences for society at large, these are unintended consequence since capitalists are motivated, as Smith observed, by self-interest. Therefore, if capitalism itself produces at a level that is environmentally unsustainable, it is inconceivable that free-market processes alone can correct this failure. A focal point in the present paper is the role of work time and consumption. Consumption is used as an economic category reflecting the sum of goods and services consumed by individuals, households, nation states, or globally. An incongruence which can emerge is between rational capitalist behaviour on the one hand, and societal welfare on the other. The CEO of a company has a fiduciary responsibility to shareholders, and the wellbeing of workers is generally of secondary concern in this role (legal restrictions notwithstanding). However, working hours and work–life balance are fundamental to the wellbeing of workers, and have been subject to investigation and regulation for the last three centuries at least. In the following section, we shall consider the contribution reducing work time can make to sustainable living, discussing a number of economic work time theories (Marxian, neoclassical, feminist). Thereafter, working hour patterns across a number of OECD countries will be examined in the context of GDP per capita, reviewing the trends in average annual working hours for five OECD countries (Germany, USA, UK, South Korea, and Mexico). We will explore what is possible, and the barriers to work time reduction as part of the sustainability policy mix. Before concluding, the penultimate section will consider policy choices in relation to sustainability, welfare, and work time, in the context of economic development, distribution, and gender.

Work time theories There are a number of schools of thought, members of which have contributed to the debate over work time. There are those – such as neoclassical, Weberian,

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and institutionalist theorists – who assume a degree of rationality and stability in capitalism (Hermann 2015). Marxist, post-Marxist, and feminist perspectives, in contrast, emphasise the class dynamics of capitalist society, and patriarchy, as key drivers in determining the nature and hours of work. These approaches point to there being contradictions within contemporary capitalist society which hamper self-realisation and welfare, and undermine environmental sustainability. The Marxian analysis of work time is outlined in the first volume of Capital, originally published in 1867 (Marx 1976 [1867]). In Chapter 10, Marx considered the historical conflict over the length of the working day as a struggle between the class of workers and that of capitalists. As capitalism pursued its drive for expansion and accumulation, so working hours increased. Marx modelled this by looking at how the length of the working day was distributed between necessary labour time (the time taken by the workers to produce the equivalent of what their household consumed) and surplus labour time (which generated profit, interest, and rent). The ratio of surplus to necessary labour time was defined by Marx as the rate of capitalist exploitation, and one way to increase this was by prolonging the length of the working day. In response to a perception of work time excess in the United Kingdom, a series of factory acts were passed in the early part of the nineteenth century limiting weekly working hours. This prolongation of the working day was accompanied by the appropriation of supplementary labour – women and children – into the labour market, thereby increasing the labour force participation rate. Initially, the factory acts sought to limit the hours of women and children, since this was particularly controversial. This also established norms, and male working hours fell too, as the factory acts were extended. Thus, in the second half of the nineteenth century, Marx suggests that the emphasis shifted towards intensive labour utilisation based on productivity increase and work intensification (relative surplus value production). At the onset of the industrial revolution there were problems in ensuring employees worked the standard hours in the factory. “Saint Monday” – the tradition of absenteeism on a Monday – was common among craft workers, and at the onset of the industrial revolution this provided a challenge for the emergent factories. Relatedly, Marx examined workers’ preferences regarding work time and maintained that workers preferred shorter hours and would forego the additional wages associated with longer hours. In recent years this has been investigated in the UK context, examining preferences for reduced hours with an associated reduction in wages (see Wheatley et al. 2011, Philp et al. 2015). In the UK case, this research provided evidence that workers are working for longer than they would choose to. Recent trends in annual average hours worked will be explored in more detail in the section on distribution and development. Economics is, of course, dominated by a strong mainstream tradition, which can be traced back to the marginal revolution of the 1870s. In the neoclassical model of working hour determination work is categorised as an economic

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“bad” from which workers derive disutility. They will therefore trade-off the utility derived from wages (and associated consumption) against the disutility of work. There are a number of problems with this rational choice account of working hours’ determination, as noted by heterodox economists as well as scholars working within other social sciences. Of course, institutional norms frequently erode choices over hours so that hours and income cannot be traded-off continuously. In reality, choices might be between better quality full-time jobs and inferior (in terms of job quality) part-time work. In addition, mainstream economics does not offer an account of preference-formation. The nature of capitalism itself bombards us with a consumerist narrative, therefore the absence of an account of preference formation in neoclassical economics implies it is very limited in terms of explaining the process through which working hours are determined. Feminist economics is an approach that examines the relationship between gender and power in the economy, looking at how economic knowledge is constructed and legitimised. Early work by Boserup (1970) examined the role of gender, and its inter-relationship with agricultural and industrial transformation. Waring (1988) is also seen as an important early contributor, in particular challenging the neglect of women’s unpaid work in systems of national accounts. In 1992, another milestone was the formation of the International Association for Feminist Economics (IAFFE 2019). Feminist economics fits within the broader remit of feminist theory, which aims to understand the nature of gender inequality by examining women’s social roles and lived experience. There are a number of themes which are especially pertinent to sustainability and work time, which we shall consider here. However, we should note that feminism, and feminist economics, are approaches that present myriad ways of understanding contemporary societies. One concern for feminists is with social, as opposed to physical, infrastructure. Thus, Pearson and Elson (2015) point to the need to invest in sectors such as care, education, and health, which comprise relatively feminised workforces. Health and education are partly supported by the State, but also within communities through families, and formal and informal volunteering. Contemporary capitalist society values these activities less (in remuneration terms) than jobs in the market sector. Likewise, there have been a series of conflicts over comparable worth, and by way of example the UK supermarket industry is currently a focal point in a legal battle where female shop-floor workers are reported to earn up to £3 less an hour less than male warehouse staff (Butler 2018). Feminised work thus tends to pay less. More generally, empirical research has shown a clear negative relationship between earnings inequality by gender and GDP per capita, suggesting the experience for women in less developed nations tends to be even worse that in economies such as the UK (Kleven and Landais 2017). This notwithstanding, it is important to note that such social infrastructure has a relatively low CO2 consumption footprint with education services, human health services, and residential care and social work activities comprising 6.02%

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of UK emissions (calculated from data derived from Department for Environment, Food & Rural Affairs 2017). Feminist social scientists have also investigated the interaction between the household and work in gendered perspective. “Preference theory” was proposed by Hakim with the aim of explaining “women’s choice between family work and market work” (2000, p.1). Whilst men are assumed to generally possess work-centred preferences, there are a far greater proportion of women with home-centred or adaptive preferences. The latter refers to circumstances where women try to balance work and home, active in both. For adaptive women, employment and regulatory policy is especially important (for example women were positively impacted by the UK Work–Life Balance Campaign: see Philp, Slater and Wheatley 2015). Excessive work time thus presents a challenge for women with adaptive preferences. Overall, the nexus between work time, gender, preferences, and sustainability is important for those with a keen interest in the nature of capitalism, and power structures within it. There is evidence that workers are working for longer than they would choose, and a significant proportion would rather work fewer hours even if it entailed an associated reduction in pay. This presents a potential sustainability gain, in terms of reduced consumption. And, this resonates with the industrial revolution in England where there was resistance to prolongation of the working day in the early nineteenth century. In the next section, we shall examine working hour patterns in an international context, and consider the ramifications of this for sustainability in relation to consumption. Other strands of heterodox economics, such as institutional economics, have also explored work time reduction. Copeland (1931) observed that the arduous nature of factory production tended to bring limits in the interest of public safety and health. Commons (1921) also looked at the hours worked in industry, in particular continuous industries based on shift-work. More recent work by LaJeunesse (2009) has focussed on the importance of work time reduction as a full employment strategy. Although LaJeunesse is also concerned with sustainability, his commitment is to growth in income and wealth, while diminishing material through-put of resources.

Hours worked From a policy perspective, there are an increasing number of people who advocate shorter working weeks not just as a work–life balance strategy, but from a sustainability perspective (Arntsen and Philp 2019). Thus, Hermann (2015) argues the benefits of a 30-hour working week include more equal distribution of work between men and women, relief for those who have to combine paid and unpaid work (including care), and ecological sustainability. For benchmarking purposes, in what follows, a 30-hour work week, based on a 47-week working year, would equate to 1,410 hours annually.

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Working hours are often thought of as a secondary concern, by economists and policymakers, relative to GDP per capita. For example, Maddison (1995) pointed to interesting trends, with significant achievements being made by a number of East Asian “Tiger” Economies in the period 1950–1992. By 1992 Maddison observed that Hong Kong had become the fifth ranked economy globally by GDP per capita, and Singapore had risen to sixteenth (one above the United Kingdom). At that time, the United States was ranked highest in terms of GDP per capita, and Japan was ranked third. But reducing regional and international comparisons of “development” to GDP per capita alone remains problematic (Harvie et al. 2016). As noted by Crafts (1997), a GDP per hour worked measure of economic welfare may be preferable since high GDP per capita may be driven by long hours. And, excessive hours can be regarded as deleterious to health and wellbeing. If we look at a GDP per hour worked, or productivity measure, data from 1992 indicates that the United States drops to ninth in global rankings, Japan drops to eighteenth, and the performance of the South East Asian “Tiger” Economies appears much less impressive. Therefore, work time matters. If we look at the patterns for working hours in OECD countries today it is generally the case that the higher per capita income is, the lower hours worked are (see Figure 9.1). Thus, the poorest OECD country, Mexico, also has the highest average annual working hours worked per worker. Relatively poor OECD countries (in per capita terms), such as Greece, Poland, and Latvia, work

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long hours too, varying from 1,910 to 2,035 hours worked on average per worker annually. The only South American country in the OECD – Chile – had working hours of 1,974 in 2016, which one would perhaps expect, given its low level of GDP per capita. Japan has traditionally had a long-hours culture. Indeed, there is a term in Japanese – “karoshi” – which means death from overwork (Philp 2001). Nevertheless, from 2000 to 2016 average hours per worker fell in Japan, from 1,821 to 1,713 hours, annually. Among the wealthier nations in terms of GDP per capita, South Korea, Iceland, the United States, and Ireland are noteworthy. South Korea is one of the Asian “Tiger” economies. GDP per capita in 2016 (measured in US$ 2010) was $35,014 while its workers averaged 2,069 hours per year. The GDP per capita levels of South Korea are comparable to Spain or the United Kingdom, where workers worked less, on average 1,695 and 1,793 hours per year respectively. Although data for other “Tiger” economies is not gathered by the OECD, this indicates that high GDP per capita driven by long working hours endures in the case of South Korea. The United States is also an outlier in that, despite having the fourth highest GDP per capita in the OECD ($52,321), its workers on average work longer than the OECD average (1,783 hours, as opposed to 1,763 hours). It is also noteworthy that the United States is the second largest CO2 emitter in the world, behind China which has four times the population. There is a concentration of Northern European countries among those where working hours are shortest (Norway, Denmark, and the Netherlands). These countries are also notably progressive in terms of gender equality, occupying positions 5, 2, and 3 in the United Nations Gender Inequality Index (equality is greatest in the highest-ranked nations) (United Nations Development Programme 2016). Progressive equality outcomes, in gender terms, appear correlated with low-hours nations. Indeed, if we return to Hermann’s (2015) recommendation of a 30-hour working week – to support more equal distribution of work between men and women, relief for those who have caring responsibilities, and ecological sustainability – this equates to 1,410 hours annually (assuming a 47-week working year). These nations come remarkably close to this benchmark, with average annual hours for workers of 1,410 hours in Denmark, 1,430 hours in the Netherlands, and 1,424 hours in Norway. Working hours are seen to be partially determined by the degree of economic development, approximated by GDP per capita, and shown by the line of best fit depicted in Figure 9.1. We can also identify patterns, with progressive North European economies (in terms of working conditions and gender equality) predominating in the mid-to-high-income, low-hours grouping, just identified. It is also important to consider changes in average annual hours worked per worker. We will now consider the trends in this, from the beginning of the present century, for a number of OECD countries. Five countries are considered: Germany, United States, United Kingdom, South Korea, and Mexico (see Figure 9.2). Germany is especially interesting since it has the lowest working hours in the OECD

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and yet maintains a GDP per capita level that exceeds that of the United Kingdom and Japan. This is in spite of German reunification, in 1990, which presented a challenge as the wealthy West incorporated poorer Eastern provinces. The differences between Germany and Japan, in terms of working hours, is significant, with Germany a relative success. At the advent of the new millennium, German annual working hours were already low (1,452 hours per year), with only the Netherlands and Norway comparable in terms of average hours worked. The German experience was for a relatively steady fall in average annual hours actually worked (see Figure 9.2), with isolated increases in particular years. By 2016 average annual working hours were 1,363. It is noteworthy, and perhaps related, that the German economy is characterised by (relatively) strong unions which negotiate with employers’ organisations. As such, capital and labour embrace “social partnership” in German industrial relations, with mutually beneficial gains in terms of productivity (Behrens and Helfen 2016). In contrast to the German case, the United States is characterised by weak unions and a greater emphasis on market processes, with limited intervention. In the United States working hours are high, relative to other wealthy countries. It is also a prodigious polluter. In 2000 the average US worker worked 1,834 hours a year, falling to 1,763 hours in 2009, before increasing to 1,783 hours in 2016. The United Kingdom also saw falling working hours up to 2011, but from 2011 to 2016 average annual hours actually worked per worker increased from 1,634 to 1,676 hours. This may reflect political change as the period of the New Labour governments from 1997 were marked by a number of policy initiatives related to work time regulation and work–life balance – allied to flexible working for employees – which generally improved workers’ satisfaction with their hours (see Philp et al. 2015). In spite of this protracted period of Labour government (up to 2010), trade unions remained relatively weak, in contrast to the German example.

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Germany, the United States, and especially the United Kingdom were early industrialisers. The OECD comprises other nations that have industrialised more recently. We will now consider two: (i) South Korea (one of the Southeast Asian “Tiger” economies); (ii) Mexico. In the period 2000 to 2016 South Korea witnessed substantial reductions in working hours, from 2,512 to 2,069. This represents a fall of over 17%, albeit from a relatively high starting point (as noted by Crafts above). In the OECD, only Chile comes close to this fall, with average hours declining from 2,263 to 1,974 over the period, i.e. a fall of just under 13%. In spite of this, if we look at Figure 9.1, we can see that in 2016 South Korea remained an outlier in terms of annual working hours, along with other notable long-hours nations. Finally, the case of Mexico is worth discussing, as the poorest nation (in per capita terms) in the OECD. Average working hours in Mexico were 2,311 in 2000, falling to 2,255 in 2016 (i.e. by 2%). The GDP per capita level in Mexico was $16,969 in 2016 (US$ 2010). This low level of per capita income may explain the persistently long hours worked by the average Mexican worker, at the same time as it was in a free trade agreement with a powerful economic neighbour, which itself is an outlier in terms of average hours actually worked per worker annually.

Distribution and development The patterns of working hours and GDP per capita plainly have an economic development and social dimension to them. They are also relevant if we consider issues of environmental sustainability and long-term issues of societal progress. Pre-industrial societies were complex, and traditions varied spatially and temporally. However, there are instances where populations adopted a subsistence, rather than a maximisation, approach. Instead of using available time to maximise their household income, they minimised labour expenditure in order to attain a satisfactory “subsistence” income. A more recent example can be drawn from the Maya of Yucatán, who are part of the indigenous populations of south-east Mexico and Central America. The “solar” is a plot of land inhabited by Maya families. Since the mid-1990s land reform in Mexico (enacted through the North American Free Trade Agreement, NAFTA) has resulted in the spread of private property relations through previously communal lands: “The significance of these processes lies in their assault on the solar’s pivotal historical role in supporting the Maya’s sustainable and resilient selfsubsistence mode of production and land use …” (Cabrera Pacheco 2017, p. 503). “Subsistence” would not necessarily be at a bare physiological level (say, equivalent to minimum calorific values), and would have a social component to it. This caveat aside, “satisficing” behaviour might be one of the reasons why workers find it difficult to adapt to the regime of the factory, with traditions such as “Saint Monday” persisting. In spite of this, in the industrialisation process in England, working hours rose initially until legislation in the first half of

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the nineteenth century restricted the hours of men, women, and children. In response to this, employers sought to increase the productivity of workers, thus prioritising “intensive”, as opposed to the “extensive”, utilisation of labour. In terms of macroeconomic policy objectives, mainstream economics presents sustained economic growth as a key macroeconomic objective (along with full employment, price stability, balance of payments equilibrium, and exchange rate stability). CO2 emissions and environmental sustainability, however, must lead us to challenge this canon of contemporary neoclassical theory. This presents new challenges since underdeveloped and developing nations aspire to raise the living standards of their citizens. This brings in the need to consider: (i) objectives other than “maximisation”; (ii) distribution; (iii) the welfare or wellbeing of nations. Mainstream economics has a focus on maximising outcomes such as profit or growth. Non-mainstream economists, such as Simon (1956), have considered non-maximising behaviours such as satisficing (e.g. subsistence agriculture, discussed above). Although mainstream economists will frequently present maximising objectives as a positive hypothesis (in an explanatory sense), in actual fact it is a normative canon which is uncritically accepted by the mainstream. The empirical evidence on the effects of rising GDP per capita on happiness or wellbeing is mixed. One interesting example is provided by the Easterlin (1974), who explored whether developed nations were typically happier than those in relatively poor countries. He found that within countries those that had higher incomes were typically happier than those less well off. However, “the happiness differences between rich and poor countries that one might expect on the basis of the within-country differences by economic status are not borne out by the international data” (Easterlin 1974, 118). The implication of this might be that once emerging nations hit a “threshold level”, in terms of GDP per capita, further increases are unlikely to increase the general welfare of the population. Moreover, this may even provide an argument for de-growth in developing nations concurrent with growth in emerging economies. Distribution by class, gender, and nations represents profound challenges for contemporary societies, in particular in emerging economies. Wealth concentration has been considered by Piketty (2014). He expects the rate of capital return in developed countries to be greater than the rate of economic growth, with the repercussion that wealth inequality will increase in the future. In order to remedy this, Piketty proposes a progressive global tax on wealth. Aside from developing nations, in countries such as the United States income inequality has increased substantially since the 1970s. Thus, distribution within nation states matters, as does global distribution. In seeking to address the needs and aspirations of emerging economies, there are potential “equality gains” to be made that would facilitate an improved global distribution by nation, at the same time minimising the harm (in per capita GDP terms) in developed nations. Distribution of work time is also one way to accomplish a realignment within societies which are polarised.

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According to Arthur Schopenhauer “buying books would be a good thing if one could also buy the time in which to read them” (quoted by Steedman 2001, 2). Contemporary developed Western economies find their populations increasingly polarised into groups comprising the money-rich-time-poor and the money-poor-time rich. This creates a dystopian landscape in which human potential for self-realisation and welfare is not being fulfilled. As economies progress and develop, so working hours have a tendency to fall. Our argument has been that productivity increase and technological change create the potential to transform towards a society in which environmentally sustainable living is the norm, but capitalism itself acts as an impediment to this process. A realignment in priorities towards work–life balance and more equitable distribution is called for in order to realise sustainable consumption. Thus, emerging economies need to consider their trajectory. North European countries have tended to focus on distribution, equity, and work–life balance, whereas other developed nations have clung on to long-hours practices (United States, Japan). South Korea is an example of a country that has transitioned, in terms of GDP per capita, and has made some progress on work time. Mexico, as an emerging economy, remains somewhat in the shadow of the United States, both in trade terms, and culturally, vis-à-vis work time. The economic structure of contemporary societies can be more supportive of welfare and wellbeing through realigning activity from physical to social infrastructure, as advocated by feminist economists. Emerging economies should strive for a better work–life balance that would provide additional opportunities for care, to be supported within the household. Moreover, progressive taxation and government expenditure can be used to support education services, human health services, and residential care and social work activities. Rebalancing the economy in this way will enhance the welfare and wellbeing of men and women in an environmentally sustainable way, since these sectors impose a relatively low CO2 consumption footprint. In particular, in the face of the global threat of environmental catastrophe it is necessary to consider objectives other than maximisation, and this is especially so for emerging economies. “Satisfactory” outcomes, in terms of growth and income per capita, should become the focus.

Conclusion This chapter began by considering a plurality of ways of understanding work time within capitalism, focussing on neoclassical, Marxian, and feminist economics. The first, neoclassical economics, takes the efficiency of capitalism as its starting point, and considers instances of market failure (such as monopoly or externalities). It has traditionally focussed on the maximising behaviour of atomistic economic agents, and focussed on society’s goals in terms of macroeconomic objectives: sustained economic growth, low unemployment, stable inflation, and balance of payments equilibrium. Marxian and neoclassical

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economics pay greater heed to the inefficiencies of capitalism, in particular in relation to its inability to produce equitable and sustainable outcomes. Our argument has been that we are faced with an environmental crisis and that it is unimaginable that an unreformed capitalism can remedy this. Solutions to this crisis require significant action, and work time reduction (with an associated reduction in consumption) is part of the policy mix. There remain problems as relatively impoverished nations seek to raise living standards to a satisfactory level. It is plausible that rebalancing the economy toward more sustainable sectors – education services, human health services, and residential care and social work – can provide socially valuable work which has a more limited ecological footprint than heavy industry, or energy production for example. But distribution remains key in addressing the profound threat humankind faces. While we would not rule out an enduring and significant role for a capitalist subsector within the macroeconomy, its dynamics and regulation must be shown to be congruent with progressive distribution, environmental sustainability, and maintaining the welfare and wellbeing of people.

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10 GREEN INNOVATION IN SOUTH ASIA’S CLOTHING INDUSTRY Issues and challenges Amira Khattaki

Green innovation: the current state of play As consumers, we are buying more clothes than previous generations. We are also disposing of more clothes. It is estimated that most clothes we purchase are disposed of within a year (Wicker, 2016). In the United States alone, in less than 20 years, the volume of clothing disposed of doubled from 7 million to 14 million tons (Wicker, 2016). The increase in consumption, and by extension production, has implications for the environment as clothing production requires significant amounts of water and energy, and in addition leads to water pollution. Further, the production of synthetic fabrics, such as polyester, use large amounts of crude oil and other materials that release volatile compounds (Binkley, 2010). Because synthetic fabrics are essentially a type of plastic made from petroleum, they will take hundreds of years to biodegrade (Wicker, 2016). It is estimated that half a million tonnes of plastic microfibres are released each year from washed clothes thus contributing to ocean pollution (Laville, 2017). Consumers, civic organizations, and media have becoming increasingly critical of environmental hazards resulting from the production of clothing. Recently, fashion designer Stella McCartney criticized the industry for the harm being caused to the environment; along with environmental campaigners, she is calling for changes to the way clothing is produced. A global online survey undertaken by Nielsen in 2015 found that despite a difficult economic climate, almost three-out-of-four respondents were willing to pay more for products and services that come from companies committed to positive social and environmental impacts; the findings are up from 55% in 2014 to 72% in 2015. Hence,

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considering the negative environmental and social impacts of the clothing industry, sustainability has become a key competitive strategy for many fast fashion retailers. Leading buyer firms (such as retailers, brand marketers and manufacturers) in the clothing industry operate a low-cost, high inventory turnover strategy (Palmatier, Stern, El-Ansary, & Anderson, 2014) which for many years has resulted in the outsourcing of non-strategic activities including manufacturing to supplier firms in low-cost countries. This business model allows buyer firms to focus on their strategic strengths, for example, design, branding, and marketing. Moreover, clothing designs are changing frequently or, to put it simply, “made not to last” (Wicker, 2016). With the increase in outsourcing of production, social and environmental hazards have been shifted to developing countries, thus leading to a major environmental burden (Niinimäki & Hassi, 2011). Increasingly, buyer firms are embracing green initiatives due to pressure from consumer organizations amongst others. The reporting of sustainability practices in a company’s annual report has become a common practice. The requirements for corporate sustainability practices are diffused to supplier firms as well because buyer firms cannot claim to be green if their manufacturing processes are not green. Thus, green innovation initiatives in the manufacturing sector in emerging economies are mainly buyer-driven (Khattak, 2013). Environmental hazards in the clothing industry include ground water depletion, resource inefficient production processes, the unavailability of resources, and the lack of waste management measures (Hassan, 2015). Environmental (or green) innovation refers to “any product, process, organizational, social or institutional innovation that is able to reduce environmental impact and resource use” (Borghesi, Cainelli, & Mazzanti, 2015, p. 2). There are three key stages in clothing production, namely input, process, and output stages, which are by extension self-explanatory (De Marchi et al., 2010). The key stage where supplier firms can undertake green initiatives is the process stage. During this stage, green initiatives involve carbon emission reduction, waste management, as well as achievements in energy and water efficiency (Khattak et al., 2015; Khattak & Stringer, 2017). Green innovation measurements for supplier firms consist of three elements. First, the manufacturing process effectively reduces the emission of hazardous substances or waste; second, the manufacturing process reduces the consumption of water, electricity, coal, and oil; and third, there is a reduction in the use of raw materials. A key benefit for supplier firms working with buyer firms is that buyers can provide supplier firms with access to international markets and market intelligence. As a result, supplier firms can increase their productive capacity through improved product quality and process innovation initiatives and by gaining marketing insight and skills. By extension, buyer firms also play a major role in green innovation by pushing supplier firms to upgrade and providing them with the necessary knowledge (see De Marchi et al., 2013; Khattak et al., 2015; Khattak & Stringer, 2017). Supplier firms seek to engage in green innovation

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initiatives to ensure continued access to markets through buyer firms’ networks. However, embracing green innovation practices is not easy for supplier firms, particularly those in developing countries. Talegeta’s (2014) research into small and medium sized enterprises (SMEs) in emerging economies, found that the high cost of innovation, lack of finance, the organizational culture, and limited research and development infrastructure were the main barriers for SMEs in achieving technological innovation. Further, green initiatives do not necessarily yield higher profits (Goger, 2013; Khattak and Pinto, 2018) as buyers are not willing to pay higher prices; nevertheless, benefits in terms of cost savings in the long term can be obtained by supplier firms (Khattak et al., 2015; Khattak and Pinto, 2018). This chapter examines green initiatives undertaken by four supplier firms in the clothing industry in Sri Lanka and Bangladesh, and the challenges each of these firms faced. The firms were all pioneers in the South Asian region embarking on green initiatives; indeed, the Sri Lankan firms were the first in the world to undertake environmental innovation. Greening was a new concept for the four firms, bringing with it several challenges. This chapter outlines how the four supplier firms attempted to tackle these challenges. The chapter proceeds as follows. After introducing the supplier firms and the criteria behind the selection, the chapter discusses the challenges faced by the firms whilst embracing green innovation and how they tackled these challenges. The conclusion sums up the whole chapter.

Case firms: four environmentally focused firms This chapter draws on semi-structured interviews undertaken with four supplier firms in 2011; one firm from Bangladesh and three firms from Sri Lanka. Both Bangladesh and Sri Lanka rank amongst the ten top exporters of clothing in 2015 (WTO, 2015). The export value for Bangladesh (in 2015) and Sri Lanka (in 2016) was US$ 25.49 billion and US$ 4.6 billion respectively (Sri Lankan Export Development Board, 2017). Further, the three Sri Lankan firms rank amongst the world’s 50 most important suppliers. Each firm operates several factories. The four firms were selected through purposive sampling with the intention of identifying clothing firms that had undertaken greening initiatives in one or more of their factories. Interviews were conducted in 2011 with 12 firms in each country, along with industry representatives, international buyers, and government officials. Only the four case study firms had undertaken environmental initiatives. The other firms were hesitant about environmental innovations due to uncertainty about the benefits or return on investment (Khattak & Stringer, 2016). Hence, the four firms were selected with the purpose of exploring and understanding green innovation drivers, processes, challenges, and outcomes of green innovation. The three Sri Lankan firms have Leadership in Energy and Environmental Design (LEED) certification, a standard developed by the US Green Building

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Council (USGBC). LEED is a globally recognized certification related to environmental sustainability – including energy and water efficiency, and waste management – in industries including clothing. At the time of data collection, there were three LEED certified factories in the clothing sector in Sri Lanka (hence all selected). Further, the Sri Lankan firms are signatories of the United Nations Global Compact and the International Standards Organization (ISO) 14001 certified. In Bangladesh, the interviewed firm was the first to list itself with Global Reporting Initiative (GRI) as an international stakeholder in 2011 as environmental reporting is a new trend in the clothing industry. The firm is 14001 certified and a signatory of the Global Compact. More recently this firm has become LEED certified as well. All firms were categorized as large firms, both in terms of employees and sales value, according to the criteria used in Sri Lanka and Bangladesh to measure the size of clothing firms. All firms were in strategic relationship with their international buyers and were manufacturing high value-added products for export to top retailers and brand marketers in the United States and Europe (see Table 10.1). Further, each firm was financially sound. Initially, all four firms were engaged in environmental initiatives, for example, carbon emission, energy and water efficiency, and waste management. Now firms have started shifting towards using non-toxic dyes and chemicals and a few are manufacturing products made up of organic cotton.

TABLE 10.1 Overview of the case study firms

Firm

Sales in US$ million (2010)

Number of employees (2010) Product lines

Number of LEED Cer- Main green factories tification in export in 2011 (and markets 2017) 2011

Sri Lanka 1

$300

14,000

Gold

EU, US

1 (3)

Sri Lanka 2

$800

50,000

Platinuma

EU, US

1 (1)

Sri Lanka 3

$400

35,000

Platinum

EU, US EU

3 (4)

Bangladesh 1 $35

10,000

Jackets, pants, skirts, shorts, nightwear, children’s wear Swimwear, sportswear, intimates, lingerie Intimates, casual wear, lingerie t-shirts, pants, sportswear, jackets,joggers

Appliedb

0c (2)

a Platinum is the highest LEED rating, indicating that the platinum certified buildings are among the greenest in the world. b Now in 2017 LEED Gold certified. c Green factory under construction. Source: Authors

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Challenges associated with green innovation The four firms began implementing greening initiatives from 2008 onwards (Khattak & Stringer, 2016). Buyer firms were the main driving force behind the supplier firms’ doing so. The buyers expected all the four firms to convert their processing to green manufacturing. They pushed the firms due to possible changes in legislation in their home countries and also as a result of inclusion of environmental protection as an element of their corporate social responsibility programs. Not all supplier firms were encouraged to upgrade their manufacturing processes, only highly capable suppliers in a strategic relationship with the buyer firms (Khattak et al., 2015), hence the four firms were selected. We now go on to discuss challenges the firms faced in undertaking green initiatives.

Greening: a fuzzy concept At the time, greening was a new and fuzzy concept for the supplier firms. Indeed, they were not sure what greening meant and how it could be applied to clothing manufacturing. Despite buyer firms being the driving force, the supplier firms each had to acquire technical knowledge from abroad, at their own expense: “We are buying the technical support” (Bangladesh Firm 1). Later though, buyer firms helped them gain knowledge and supplied contacts for experts or intermediaries. Two Sri Lankan firms commented: When we were building this factory, there was no road map as to what constitutes a green factory. So literally we had to study and look at the internet and obtain ideas as to what would constitute a green factory. (Sri Lanka Firm 1) So, part of our challenge was to figure what should be the key performance indictors (KPIs), what should be the parameters to look at, when sort of, this was a not a very fluid concept. You cannot interpret the implications and the definitions of what it is. (Sri Lanka Firm 2) Later, firms started transferring the knowledge they gained from establishing their first green factory to their other factories. Their employees became specialists not only in designing and implementation of green plans but also in localizing the imported technologies: We have an energy and environmental division. We mainly look after the entire group – energy and environmental and basically engineering related stuff. So, all the designs and everything are approved here. When we are doing new construction or when we are doing renovation we are always

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thinking so how we can reduce consumptions and how we can reduce energy and things like that. We have a good team. (Sri Lanka Firm 3) That was primarily because we sort of did an experiment, it was an experimental process. And we came up with a better methodology to make it a little bit better. So, we did that. We are taking the technologies that were developed [for the green plant] to some of our other plants. For example, we created a new lighting system. So, there is technology transfer going to the other plants. So, if some division is looking at building a new plant the first thing they do is go and see the factory to see how much we can learn from what was done there. (Sri Lanka Firm 2) Hence, knowledge spillovers are an outcome of green innovation both in terms of processes and skills enhancement. After adopting green technology, supplier firms transferred the technologies, processes, and designs of their green factories to traditional and new factories. The four firms were not only trend setters but also facilitated the main streaming of ideas pertaining to green innovation. One firm reflected, We created that [local green power purchase agreement to supply green energy] and we were the first company to use that. Now that facility is kind of main stream now. Now any company can use similar facility for them to get green power. (Sri Lanka Firm 2)

Low or no returns on investment The potential lack of return on investment was a key concern for all the supplier firms, particularly as they were the pioneers: Financial challenges have always been there because the upgrades tend to be fairly costly. Like a longer pay back. So how much an organization can sort of lock out capital for these things is always the question … So, trying to strike a balance between fast pay back and slow pay back programs [is a challenge]. (Sri Lanka Firm 2) A company like ours we can invest, may be pay back in one year, one and a half years, maximum maybe two years. So, if we want to change our technologies and the pay back is more than three years so there will be big difficulties as to how we can fund those type of debts. (Sri Lanka Firm 3)

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Most buyers did not offer premium prices for products manufactured in a green manner. Lean prices were a key criterion for buyers, and thus price was a discouraging factor for supplier firms seeking to innovate. “Buyers admire it [environmental initiatives] but they do not pay us extra for it” (Sri Lanka Firm 1). Nevertheless, supplier firms were optimistic about the future of the low carbon industry. “We are communicating with buyers to put a premium price on our green products, but they are not willing to pay that additional one or half dollar. But it will improve” (Sri Lanka Firm 3). Buyers use the argument that consumers are not willing to pay more – even a few cents – for clothing produced in an environmentally sustainable manner. Hence supplier firms were increasingly focused on the lack of return on investments against the benefits of engaging in environmental initiatives. The representative from one firm stated, “So far we are not seeing any sales growth with sustainable initiatives, but in the future maybe because most of the customers I know” (Sri Lanka Firm 3). Nevertheless, economic benefits can accrue because of cost savings through reduced electricity bills, fuel costs, and paper costs (Khattak et al., 2015).

Lack of local resources Lack of local technological, institutional, and financial resources were major impediments to understanding green innovation. In both Bangladesh and Sri Lanka, low-cost funding and/or grants for firms to become environmentally friendly or undertake ecologically innovative projects were not available. Further, there was a lack of local institutional and financial infrastructure which could have supported the firms either in financing or facilitating the process of green innovation: A challenge is how we can get the finance. You know most of the other countries they have financial schemes like very low-cost loans and the government is funding this type of initiative because there are other benefits. But in Sri Lanka we don’t have any such facilities [and] mainly we are working using our own funds. (Sri Lanka Firm 3) They also commented: In terms of the environment we need to start those types of projects but [we need] low cost funding, grants etc. As a company, we are trying to obtain some funds from the Asian Development Bank (ADB) and other types of organizations. But still we are not successful … but we might need it. And there should be some way to float money for these type of initiatives. (Sri Lanka Firm 3)

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Beside the lack of financial support, local regulatory and technological facilities were also not in line with other emerging countries. The lack of local regulatory infrastructure was linked to an unawareness, of the importance of green innovation. As mentioned by one firm: Carbon trading1 is introduced, and it is good for a country like Brazil, India, and the big countries. For Sri Lanka, it could be problematic. Our projects are so small for example hydro. If you implement it, we can sell a bit of carbon, but the processing costs for carbon trading, is huge. So sometimes it’s not worth it and it is very difficult because of a lot of criteria. Our scale of business and our scale of things are very small. (Sri Lanka Firm 3) A second firm mentioned their efforts to create infrastructure: We wanted to have a green power purchase agreement to supply green energy to this facility. We did not have such a facility available in Sri Lanka. So, we worked with the Public Utilities Commission, which is the local energy regulator to devise such a scheme to be used in a specific instance. So, we created that, and we were the first company to use that. (Sri Lanka Firm 2) Despite the lack of financial and local regulatory infrastructures in both countries, the four firms each went beyond their capabilities. As mentioned earlier, a lack of local technological capabilities affected the greening process adversely. The development and upgrading of technological skills is linked to government priorities and budget allocation to technologically advanced processes and skills associated which such processes. As mentioned by the Bangladeshi firm, “initially we planned to go with the engineering university locally. But they took so much time, we switched to another architect firm [private international]”. It is worth mentioning that the greening trend that these firms set affected policy makers in terms of devising and implementing green initiatives facilitative policies. For example, in case of Sri Lanka, green power supply regulations and authority were formed after a Sri Lankan clothing firm worked with the Public Utilities Commission (a public energy body) to devise regulations related to green power supply. Similarly, the Central Bank of Bangladesh designated $500 million of low-cost financing to support green innovation in 2015. The clothing industry is the major foreign exchange earner and export category for the country.

Inculcating the green vision among employees According to Talegeta (2014), the organizational culture can limit, or foster performance of innovation, and hence organizational activities cannot be achieved without the buy-in of employees. The changing of employee’s mind-sets was

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a major challenge faced by the supplier firms and thus a major step towards implementing environmental innovations. Educating workers about, and training them in environmental initiatives was critical in both conceptualizing and implementing sustainability programmes. “It is not just investing money and acquiring the technology. That is not greening. The most critical step was to change the mind-set of the people inside the organization across all levels” (Sri Lanka Firm 3). Firms used various methods to educate the employees: posters, green rallies, and green meetings. One firm used the logo of “Haritha Peraliya” (Green Revolution) to create awareness about climate change, its effects on the planet, and repercussions for future generations. One Sri Lankan firm in collaboration with the United Nations Educational, Scientific and Cultural Organization (UNESCO) undertook a project called “Eco Go Beyond” to train employees and local youth within the area surrounding the factories about sustainable development. Extensive training was given to create awareness about waste segregation and diverting 100% waste from landfills because waste segregation was not a common practice in South Asia. Greening innovation was linked to wages, bonuses, and KPIs of employees and departments. The case firms paid higher wages as compared to other firms. Bonuses were paid to employees and departments meeting environmental KPIs. At one Sri Lankan firm, employees who biked to work were entitled to a bonus. The bonus was introduced to enhance awareness about environmental issues and motivated employees to engage more fully in environmental initiatives. “we are paying them a little more which means we cost a little more to the customer [due to social and environmental initiatives and certifications]” (Sri Lanka Firm 2). Furthermore, sustainability as a KPI had been included in the overall KPI of all firms interviewed. “They [executives] come up with the innovative ideas and there is competition among all the units to improve operations in sustainability terms and its 40% of overall KPI” (Bangladesh Firm 1). “And if there is any deviation from the set environmental KPIs, which are set at the start of year, that has to be adjusted in proceeding months” (Sri Lanka Firm 3). The training pertaining to the importance of greening helped lead to motivated employees: “Employees are motivated [about environmental initiatives] and they are productive” (Sri Lanka Firm 3). A second firm commented that by being part of the firm’s green initiatives “they are proud to work here” (Sri Lanka Firm 1). Another firm also noted such enthusiasm: We have seen a lot of enthusiasm in simple things, like separating waste and recycling. A lot of focus on energy and water saving. So, it’s very well received. I can’t honestly tell you that it is leading to better productivity because we don’t know. But we will certainly say that people are responding to it. (Sri Lanka Firm 2)

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Hence our findings suggest that employees were enthusiastic about being part of environmental initiatives and this was possible only after a well-designed and targeted training about the importance of environmental issues. Employees felt proud to work for a firm with a positive attitude towards the environment.

Conclusion For the four supplier firms in Bangladesh and Sri Lanka, undertaking green innovations was not an easy decision. Nevertheless, despite facing several challenges, the firms successfully implemented green innovation practices in their factories. As the four supplier firms were large sized firms with sound financial capabilities, they were able to finance their environmental innovation. Size relates critically to the way in which firms respond to environmental changes and large firms respond differently to institutional change (Bluhm & Schmidt, 2008). For example, larger firms are better able to withstand the changing competitive dynamics and sourcing practices of buyer firms (Frederick & Staritz, 2012). Each of the firms undertook resource risks to embrace green innovation which was initially buyer driven. However, all firms went beyond what was required by the buyer firms in terms of environmental compliance which suggests that their own strategic intent also played a major role. All four firms were not only pioneers in green manufacturing and set trends in their industries in their respective countries, but they also pushed local regulatory bodies to establish regulations and bodies related to green aspects of manufacturing. That was at a time when there was not even a single local consultant and regulatory body in either country. Following the environmental initiatives of these pioneer firms, a total of 28 factories in Bangladesh have now obtained LEED certification, of which ten have obtained platinum certification (The Asia Foundation, 2016). Similarly, the number of green manufacturing firms in Sri Lanka was five in 2014 (United States Green Building Council, USGBC, 2015). Increasingly clothing firms in Bangladesh are now seeking LEED certification (Asian Green Buildings, 2015). Moreover, in both countries, Green Building Councils have been established as not-for-profit organizations. The Councils in both countries are committed to transforming industries by encouraging the adoption of green building practices. Green innovation has become a trend now in the clothing industry in both countries, whereas just a few years back the term “green” was not known to the industry.

Note 1 Carbon trading is the process of buying and selling permits and credits to emit carbon dioxide to slow climate change. Carbon trading is an effort to tackle serious environmental issue at the local or regional level (policy level). The world’s biggest carbon trading system is the European Union Emissions Trading System (EU ETS).

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References The Asia Foundation (2016). Can Bangladesh’s ready-made garment industry lead in green growth? http://asiafoundation.org/2016/04/20/can-bangladeshs-ready-made-garmentindustry-lead-green-growth/ [accessed 11 June 2017]. Asian Green Buildings (2015). Bangladesh: factories on the run for LEED certification www.asiagreenbuildings.com/9627/bangladesh-factories-on-the-run-for-leed-certification/ [accessed 4 January 2018]. Binkley, C. (2010). How green is my sneaker? The Wall Street Journal http://online.wsj.com/ article/SB10001424052748703724104575379621448311224.html [accessed 11 June 2017]. Bluhm, K., and Schmidt, R. (2008). Change in SMEs: Towards a new European capitalism? Basingstoke, UK: Palgrave Macmillan. Borghesi, S., Cainelli, G., and Mazzanti, M. (2015). Linking emission trading to environmental innovation: Evidence from the Italian manufacturing industry. Research Policy, 44(3), pp. 669–683. De Marchi, V., Di Maria, E. and Micelli, S. (2010). Environmental upgrading in global production network. Available at: www.dukeviuworkshop.org/index.php?option¼ com_content&view¼article&id¼26 [accessed 20 July 2011]. De Marchi, V., Di Maria, E. and Micelli, S. (2013). Environmental strategies, upgrading and competitive advantage in global value chains. Business Strategy and the Environment, 22(1), pp. 62–72. Frederick, S. and Staritz, C. (2012). Developments in the global apparel industry after the MFA phaseout. In G. Lopez-Acevedo & R. Robertson (Eds.), Sewing Success? Employment, wages and poverty following the end of the multi-fibre arrangement (pp. 41–85). Washington, DC: The World Bank. Goger, A. (2013). The making of a “business case” for environmental upgrading: Sri Lanka’s eco-factories. Geoforum, 47, pp. 73–83. Hassan, F. (2015). Bangladesh RMG industry in pursuit for a sustainable industry: water solutions for a sustainable textile industry. www.textilepact.net/pdf/publications/ reports-and-award/presentation_on_bangladesh_rmg_industry_in_pursuit_for_a_sustai nable_industry.pdf [accessed 4 January 2018]. Khattak, A. (2013). A comparative analysis of South Asian apparel firms in global value chains: governance, institutions and upgrading (Doctoral dissertation, ResearchSpace@ Auckland). Khattak, A., Stringer, C., Benson-Rea, M., and Haworth, N. (2015). Environmental upgrading of apparel firms in global value chains: Evidence from Sri Lanka. Competition & Change, 19(4), pp. 317–335. Khattak, A. and Stringer, C. (2016). The role of suppliers in the greening of GVCs: evidence from the Sri Lankan apparel industry. In M. Mustafa Erdoğdu, T. Arun & I. H. Ahmad (Eds.), Handbook of research on green economic development initiatives and strategies (pp. 539–559). Hershey: IGI Global. Khattak, A. and Stringer, C. (2017). Environmental upgrading in Pakistan’s sporting goods industry in global value chains: a question of progress? Business & Economic Review, 9(1), pp. 43–64. Khattak, A., and Pinto, L. (2018). A systematic literature review of the environmental upgrading in global value chains and future research agenda. Journal of Distribution Science, 16, pp. 11–19. Laville, S. (2017). A Stella McCartney campaign shot in a Scottish landfill site to raise awareness of waste and over-consumption. The Guardian. www.theguardian.com/envir onment/2017/nov/28/stella-mccartney-calls-for-overhaul-of-incredibly-wasteful-fashionindustry [accessed 5 January 2018].

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Niinimäki, K. and Hassi, L. (2011). Emerging design strategies in sustainable production and consumption of textiles and clothing. Journal of Cleaner Production, 19(16), pp. 1876–1883. Palmatier, R. W., Stern, L. W., and El-Ansary, A. I. (2014). Marketing channel strategy. (8th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Talegeta, S. (2014). Innovation and barriers to innovation: Small and medium enterprises in Addis Ababa. Journal of Small Business and Entrepreneurship Development, 2(1), pp. 83–106. USGBC (2015). LEED projects & case studies directory. www.usgbc.org/LEED/Project/ CertifiedProjectList.aspx(accessed 16 January 2015). Wicker, A. (2016). Fast fashion is creating an environmental crisis, Newsweek. www.newsweek. com/2016/09/09/old-clothes-fashion-waste-crisis-494824.html [accessed 4 January 2018]. WTO (2015). International trade and tariff data. www.wto.org/english/news_e/ news14_e/publ_27oct14_e.htm (accessed 13 June 2015).

11 DESIGNING BUSINESS MODELS TO OVERCOME THE BARRIERS TO RENEWABLE ENERGY MARKET CREATION IN DEVELOPING AND EMERGING COUNTRIES Masar box, a case study Valtteri Kaartemoi

Introduction There was a positive trend in renewable energy in the 2010s. The cost has come down, and the sector has attracted record-high additions in terms of power and capital. In these terms, Africa is no different from the rest of the world with companies such as Desert Technologies, Scatec Solar, and Terra Sola actively developing solar power solutions from ground-mounted installations to rooftops and solar carports. As a result of the investments, new capacity additions of solar photovoltaic (PV) in Africa increased from around 8 gigawatts (GW) in 2009 to around 47 GW in 2015 (IRENA, 2016b). Yet, a severe shortage of installed power generation capacity is still a reality, particularly in Sub-Saharan Africa. There are approximately 600 million people who lack access to grid-quality electricity in Africa (IRENA, 2016b). Also, the share of renewable energy sources (excluding hydro) remains below 1% of the installed capacity in Sub-Saharan Africa (IRENA, 2018a). The situation is not much better in Northern Africa. For instance, Egypt’s total installed capacity of renewables amounts to 3.7 GW, including 2.8 GW of hydropower and around 0.9 GW of solar and wind power (IRENA, 2018b). This is still far away from the country’s renewable energy targets of 20% of the electricity mix by 2022 and 42% by 2035. Renewable energy has been claimed to have “huge untapped potential” in the smaller emerging markets in Africa, Asia, and Latin America (IRENA, 2018c: 14).

i

Post-Doctoral Researcher, University of Turku

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In Africa alone, IRENA (2016b) has projected total installed solar PV capacity could reach 70 GW by 2030 (IRENA, 2016a). However, there are some challenges, which need to be overcome before tapping the potential. IRENA (2018c) lists three key challenges to rapid up scaling of renewable energy as finance and bankability, administrative and capacity, and regulatory barriers. While IRENA (2018c) suggests regulatory changes to scale up renewable energy, this chapter suggests that new business models can also be designed to overcome the challenges for renewable energy market creation. There are startups such as M-KOPA, SolarTurtle, and Masar to overcome the challenges by experimenting with alternative ways to produce and sell solar power. Yet, despite the recent growth figures in solar PV installations, it is not easy to create a market for renewable energy in Africa. In this chapter, it will be demonstrated how renewable energy companies are constrained by institutions, but how they can likewise design business models to shape institutional arrangements. The focus will be on Masar B.V.’s (Masar) attempts to design a business model to overcome the barriers to the creation of an African solar energy market. Masar1 is a Dutch smart energy startup that provides solar energy solutions in Africa. This case study is based on participant observation, in addition to expert interviews (regional solar companies, international solar financiers, and renewable energy market researchers), conducted over a three-year period (October 2014—November 2017). Conceptually, there are four approaches for understanding business models, namely static, transformational, network, and dynamic (Calia et al., 2007; Demil and Lecocq, 2010; A-G and Mustonen, 2017). The static approach refers to the business model being used as something of a blueprint for describing the components of value creation (Demil and Lecocq, 2010). The transformational approach considers a business model as a concept subject to change, while the company explores the best ways to conduct its business (Demil and Lecocq, 2010). The network approach acknowledges that the resource basis for business models is not company-specific, with network actors providing important resources for enabling the business model (Calia et al., 2007), but this approach does not incorporate change per se. The dynamic approach combines both the transformational and network approaches, to explain the capabilities and conditions for change in business models (A-G and Mustonen, 2017). This study refers primarily to the dynamic approach for business models. Theoretically, the chapter also builds on Wieland et al.’s (2017) study, which emphasizes the need to combine the institutional foundations of both markets and technologies; in other words, technological innovations and the development of markets as institutions should not be studied in isolation. The Masar case suggests that both the development of business models and the creation of markets are dependent on the institutional arrangements of actors in the renewable energy market, according to a view characteristic to service-dominant (S-D) logic (Vargo et al., 2015; Vargo and Lusch, 2016) and combining S-D logic with effectuation (Kaartemo et al., 2018; Read and Sarasvathy, 2012; Whalen and Akaka, 2016).

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While existing academic research has recognized the influence of institutions on renewable energy investments, there has been little interest to date in explaining the creation of renewable energy markets in developing and emerging countries with an institutional research approach. While acknowledging the contributions of Leonard et al. (2017), Munro et al. (2016), Nygaard and Dafrallah (2016), and Zhang and White (2016), which help illuminate the co-evolution of entrepreneurial actions and institutional arrangements, this book chapter extends that discussion by showcasing how solar energy companies are not only constrained by institutions— as highlighted by the majority of the publications in the field—but can in fact change their business models and undertake entrepreneurial actions to proactively create and shape markets. The chapter has been structured as follows. (a) Analysis of the institutional barriers which limit the creation of renewable energy markets in developing and emerging countries, introducing the idea of institutional work in markets, which suggests that companies are not only restricted by institutions but can actively create and shape markets. (b) A description of the case study in detail, exploring how Masar dynamically changed its business model to overcome the institutional barriers in renewable energy markets in Africa. (c) A reflection on the findings in the context of our current understanding of renewable energy markets in developing and emerging countries, as well as recent conceptual developments in the literature on business models, and in market creation and innovation research.

Institutional barriers and institutional work in renewable energy markets Rules and norms guide the behavior of renewable energy actors, as has been acknowledged by scholars focusing on the role of governments in boosting renewable energy markets in developing and emerging countries (for example, Blum et al., 2015; Friebe et al., 2014; Kemp and Never, 2017). Typically, this literature assumes that private firms simply accept the existing rules and norms as given. For instance, Frisari and Stadelmann (2015) show that public financial institutions can play a leading role in reducing the cost of concentrated solar power (CSP), by providing concessional loans in countries where the cost of finance is too high. In addition, they note that competitive tariff-setting mechanisms can also support the engagement of private investors in CSP in emerging markets. Similarly, Keeley and Ikeda (2017) emphasize the importance of supportive renewable energy policies in attracting foreign direct investment to developing countries’ renewable energy sectors. But to properly understand the creation of renewable energy markets in developing and emerging countries, the emphasis should not be placed solely on

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the public sector. Private sector and community engagement are also important (Mallett, 2013), as electrification programs typically require simultaneous entrepreneur-driven processes and government-led power sector reforms to succeed (Dornan, 2014). For instance, Feron et al. (2016) studied rural electrification in Chile and found that the implementation of small-scale off-grid projects was unreliable due to a lack of mandatory regulations and standards, a lack of funding for maintaining the systems, and a lack of community engagement. Sarraf et al. (2013), in turn, concluded that economic, regulatory, financial, and institutional barriers are the main causes of the gap between the potential and installed capacity of renewable energy resources in Cambodia. These studies are in line with others which reveal the most common barriers to creating renewable energy markets in developing and emerging countries (Table 11.1). Although many scholars take the institutional environment as given, there are others that consider whether renewable energy companies can also engage in what is known as institutional work—“the purposive action of individuals and organizations aimed at creating, maintaining or disrupting institutions” (Lawrence and Suddaby, 2006: 215). Institutional work (Lawrence et al., 2011; Lawrence and Suddaby, 2006) builds on the premise of institutional theory, which holds that people have shared and diffused cognitive schemas which shape their behavior and practices. These schemas or institutional arrangements both enable and constrain collaboration between people and organizations. For instance, people have certain schemas that guide how solar power plants can be installed or how they are typically paid for (e.g., capital expenditure vs. monthly fees). The institutional research highlights the importance of institutional logics—“the

TABLE 11.1 Barriers to renewable energy market creation in developing and emerging

economies Barriers to market creation Political barriers: regulatory, policies, government support, political risks

Examples

(Borhanazad et al., 2013; Feron, 2016; Frisari and Stadelmann, 2015; Gabriel, 2016; Karakaya and Sriwannawit, 2015; Sarraf et al., 2013; Shyu, 2012) Financial barriers: local awareness, afford- (Borhanazad et al., 2013; Feron, 2016; Gabability, economic, financial riel, 2016; Karakaya and Sriwannawit, 2015; Ondraczek, 2013; Otte, 2013; Sarraf et al., 2013; Scott, 2017; Shyu, 2012; Yaqoot et al., 2016) Indigenous resource barriers: commu(Borhanazad et al., 2013; Gabriel, 2016; Klinnity, partnerships, skilled labor, local captenberg et al., 2014; Ondraczek, 2013; Scott, acity, availability of products, spare parts, 2017; Shyu, 2012; Yaqoot et al., 2016) distribution networks, physical infrastructure and logistics

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socially constructed historical patterns of material practices, assumptions, values, beliefs and rules by which individuals produce and reproduce their material subsistence, and provide meaning to their social reality” (Thornton and Ocasio, 1999: 804)—in understanding social behavior. This view is not foreign to contemporary marketing thinking. In marketing, and particularly the markets-as-practice approach, markets are considered to be created and shaped as they are performed. Market practices— activities that contribute to market constitution (Kjellberg and Helgesson, 2007) —construct how markets work and are represented. Consequently, markets are shaped by the activities and interactions of different practice groups, as well as by translations between practices (Chakrabarti et al., 2013). In other words, markets do not simply pre-exist, but are continuously defined and shaped by various market actors (Kjellberg and Helgesson, 2007). Although renewable energy business research often takes institutions for granted, some evidence of market actors’ institutional work does exist. For instance, Kaartemo (2016) shows how the global PV solar market has been created and shaped over decades. Though entrepreneurs have played an important role in this process, Kaartemo notes that other actors have also influenced market development, and that the market is not isolated from the rest of society. Policy-makers have a particularly critical role to play, through legislation and the provision of funding. On the institutional side, the feed-in tariff system—first introduced in Germany in early 2000s—represented a major innovation for accelerating investments in the renewable energy sector, by providing price certainty for energy producers. China also constitutes a telling example under this regard. The Chinese government played a decisive role in supporting large-scale solar cell production in the early 21st century, which helped a number of Chinese manufacturers to enter the market and rapidly scale up their production. China’s Renewable Energy Law promoted the development and utilization of renewable energy from 2005. The law later required electricity companies to buy electricity from independent power producers. Chinese PV panel manufacturers also benefited from low interest rates, favorable land deals, and other subsidies. While these measures might not have been innovative on a global scale, they greatly increased the amount of Chinese solar panel manufacturers, eventually created overcapacity, and lowered the prices. In the context of developing and emerging countries, Nygaard and Dafrallah (2016) show how the Moroccan utility company, the Office National d’Electricité, has been successful in its rural electrification program. They identify three main contributing factors: i) a clear vision and a continuing political commitment to the plan; ii) an institutional framework which supported the actions of the utility company and its national and international partners; and iii) a finance model which included all national stakeholders and international financial institutions. Munro et al. (2016), in turn, highlight the success of the community charging station model in renewable energy dissemination in Sierra Leone, by the nongovernmental organization Energy For Opportunity. They show how Energy

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For Opportunity was able to overcome financial and technological barriers by changing the institutional arrangements for energy consumption and earning sufficient community trust to change mindsets toward renewable energy. Zhang and White (2016) identify three legitimacy-based strategies that solar PV firms have successfully used in China. They note that building legitimacy at the industry level is particularly necessary for early entrants, even more in cases like this. These “explorers” faced the liability of the novelty in an undeveloped market, and so a preliminary work was required to create and shape the institutional arrangements that late entrants (“exploiters”) take as given. While emphasizing the active role that entrepreneurs play in building legitimacy, Zhang and White also acknowledge the important role of the government in promoting and supporting entrepreneurial actions and institutional work. Leonard et al. (2017) show how a hybrid solar-diesel mini-grid at Tsumkwe village in Namibia achieved sustainability by involving community members in developing and maintaining the system, which used tariffs and prepaid metering. As a result, this project was able to overcome the challenges characteristic of many similar electrification projects in rural Sub-Saharan Africa. In general, research on renewable energy markets in developing and emerging countries is plentiful. The studies indicate that the perceived high level of risk, associated with a range of economic, governance, and institutional challenges, discourage private sector investments, particularly in the power sector in SubSaharan Africa (Bazilian et al., 2012). But these studies typically consider the institutional environment as set, not taking into consideration how solar energy companies and other market actors not only maintain but also create and disrupt institutions. This is due to the limited attention paid to solar energy startups in developing countries. As Zhang and White (2016) note, solar energy startups are not only constrained by the institutional arrangements but partake in the creation of institutions. This will be examined in the following sections, showing how a startup designed and then redesigned its business models in collaboration with other market actors to overcome the institutional barriers to African solar energy markets.

The case study: Masar B.V. Masar B.V. is a Dutch smart energy startup that provides solar energy solutions in Africa. The company’s vision is to accelerate the continent’s electrification and its transition to renewable energy. The main product is Masar Box, a shipping container-based mobile solar power plant which provides up to 100 kWp of solar power, 24 hours a day. The body of data used in this case study consists of interviews, online discussions with Masar’s CEO (3,671 messages), and memos of company observations over a three-year period, starting from September 2014, a week before Masar was formally registered as a company. The observations showed how Masar’s business model evolved as a response to the identified technological and market

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barriers in African renewable energy markets. The case will analyze the development of Masar’s business model in respect of these barriers, providing empirical evidence for a dynamic business model approach and the role of experimentation and negotiation in market creation. Serial entrepreneur Mo El-Fatatry visited Egypt in 2014, having spent more than ten years living in Finland. He had not seen his family in some time, and so was very happy to be in Egypt. But each day, as he met with his relatives, the electricity would cut out. The problem affected everyone; at times, his father and sister could not work for hours in the morning because of these power cuts. The day Mo left Egypt to return to Finland, the sun was shining brightly. It made no sense to him that there could be an energy shortage in a country so rich in solar energy. Mo began to think about how he might begin solving this problem. Following his visit to Egypt, Mo arrived back in Finland excited about the business opportunity he had identified. He had noticed that there was a real need for more reliable electricity in Africa, and the whole continent was rich in solar radiation. Mo had heard about new legislation that was on the verge of creating a solar energy boom in Egypt, and he was ready to seize the moment: “[Competition in the] Egyptian market so far zero. The law was passed 2 weeks ago” (CEO, Oct 1, 2014). At that time, the idea was to raise money for solar energy panels, identify free space on roofs and in fields, and install Masar-owned panels there. The business opportunity was very tempting, given the lucrative feed-in tariff introduced by the Egyptian government. “We install a free solar system on your rooftop and pay you 25% of what we make. Egyptians don’t need education on getting free money and the government is a guaranteed buyer” (CEO, Oct 1, 2014). In this way, the business model was designed to overcome financial barriers, by relying on the Egyptian government instead of asking African customers to pay for the panels. Yet, early on, Mo understood the potential barriers facing this business model: “[The biggest hurdles are] guaranteed payment terms by the government and the ability to raise funding in light of a weak economy in Egypt” (CEO, Oct 1, 2014). Mo realized that venture capitalists typically have an investment horizon of 3–7 years and a strict geographic focus, which might make it challenging to raise millions of euros in a region which had just experienced major political turmoil during the Arab Spring. The same hurdles which many other entrepreneurs had encountered while attempting to electrify Africa soon affected Masar, too. The Egyptian poundbased, feed-in tariff program lost much of its potential when the tariff was cut for the second round in October 2016 and even more so when Egypt’s central bank floated the pound in November 2016. However, at the same time, the Egyptian government developed the net metering scheme, which made it easier to self-consume and exchange from the renewable energy production. Moreover, it cut the payback time for solar installments from approximately ten years to seven years. Under the new scheme, solar energy companies did not need to

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interact with government agencies, as power purchasing agreements were signed directly with customers. Along with many other solar energy companies, Masar decided to build on the new net metering scheme—a system that allows individual power producers (consumers and businesses) to sell excess electricity to the grid—and shifted its focus from the public sector to the Egyptian business market. However, Egyptian companies were not willing to cover the capital expenditure for the panels, and raising funds from international investors proved challenging. Masar was therefore facing both political and financial barriers to market creation, just as many other renewable energy companies had before it. Before Masar locked itself into the original business model, however, the team started to identify other market opportunities. Mo encountered a containerized solar solution in July 2015, and soon became convinced that Masar could build an off-grid business model based on containerized mobile solar power stations. Masar followed the example of Africa GreenTec, a company that had developed a solar energy container using solar panels and lithium batteries, which enabled energy generation up to 40 kWp. As such, mobile solar stations could be a real game-changer in electrifying Africa. Understanding that there were first-mover advantages in introducing containerized solar energy to the Egyptian market, Masar secured exclusive rights to distribute Africa GreenTec’s containers in North Africa. The move, however, came as too early in a country where the government still subsidized the price of diesel. Diesel was still too cheap in Egypt at that time, 0.20 €/liter. It was expected, however, to rise by 2019 to 0.60 €/liter, offering a real opportunity to Masar. So far, the company could only match the price of diesel kWh, without any saving for the customer, as declared by the CEO (Feb 25, 2016). It seemed promising that their solution would become steadily more pricecompetitive against fossil fuels as time went on, particularly as Masar had noticed that solar power had gained an economic advantage over diesel every year since the 2008 financial crisis. This encouraged the company to stay in business, focusing on the diesel generator replacement market in Egypt, and later venturing into villages across Sub-Saharan Africa. The container-based business model required Masar to introduce new market practices. The mobility of these assets was seen as a sort of insurance policy, so that the company could redeploy its Masar Boxes somewhere else if necessary. This was considered beneficial in raising funds. There was a problem in deploying solar power in those countries in the Global Sun Belt, like Egypt, because international investors were typically the driver of solar deployment, and the area was politically unstable. The solution engineered by Masar was the conception of deployment of a fully functional solar power plant in less than 60 minutes. The solution is to pack all the components of a solar power plant (solar panels, inverters, batteries) in one container, ship the container to a preferred location, spread the pre-installed legs with attached panels on a plain field, and plug the system to the local mini-grid. As a result, it provides a faster way to

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install (and relocate) a solar power station than roof- and ground-mounted solutions that were the institutionalized solutions in the market. However, the extra costs associated with the mobility were too high for potential financiers to accept. While the solution would become ever more competitive against diesel, mobile solar power stations could not be twice as expensive as the traditional solar energy solutions investors were used to. Market practices could not be changed without the use of better technology, requiring therefore investments in R&D to make mobile solar energy more pricecompetitive against ground- and roof-mounted solar solutions. In terms of technology, the company had learnt that lithium batteries were not optimal for the extreme heat experienced in Sub-Saharan villages. In addition, the output needed to be more than 40 kWp if it was to power entire villages. Although the container came prepackaged and required minimal effort from local people to set up, indigenous resources were needed to monitor the system’s performance in case something went wrong with the container. Albeit the container was partly able to overcome the identified barriers for electrifying Africa, there was still work to be done in designing a better technological solution. In 2017, Masar began collaborating with a design office to develop a containerized solution that would have a capacity of up to 100 kWp, using the newest panel (thin film) and battery (Lead Crystal) technologies. This allowed more panels to fit within the standard container and added more years to the battery life cycle in warm conditions, which in turn made the solution more efficient. This all brought the Masar Box closer to the levelized cost of electricity (LCOE) of roof- and ground-mounted solar panels, making Masar more attractive to international investors. It was also necessary to include connectivity for remote monitoring in the Masar Box design, as it was not possible to rely on manual labor in this critical instance. The new Masar Box was therefore designed with sensors inside the unit, which tracked vital measurements such as heat, humidity, and performance, so that it would be clear if batteries were not fully charged, panels were dirty, or the unit required maintenance. Such remote monitoring requires connectivity, and so Masar—as a member of Telecom Infra Project’s OpenCellular initiative—began developing wireless access in rural areas in partnership with companies such as Facebook, Deutsche Telekom, Intel, and Nokia. With the new solution, Masar also widened its focus from the Middle East and North Africa to the whole African continent. Masar Boxes could be used as sub-stations for providing general internet services across all of Africa. As of December 2017, Masar serves both on-grid and off-grid customers in Africa. While the company sells panels and batteries to on-grid customers, the Masar Box is currently the company’s solution for electrifying off-grid African regions. Yet the mobility of the container means that it will still be useful if the grid expands. In other words, if an off-grid region becomes part of a national grid, it is possible to relocate the Masar Box to another off-grid region in Africa, while Masar also continues to provide its more traditional on-grid solutions. In

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addition to the current business model, Masar has future plans to use Masar Boxes for providing wireless access, powering water purification containers, and charging electric vehicles, all enabled by its business partners. But as such investments take time, Masar is focusing on a low burn rate and stabilizing business operations until some of the institutional barriers have been overcome and international investors are ready to invest in the company’s assets. The Masar case reveals how companies can overcome institutional barriers through unique technological and market approaches, in an example of a dynamic approach to business model development to incorporate an institutional view. It also provides further empirical evidence of the role of experimentation and negotiation in market creation. Masar has faced similar barriers to other renewable energy companies, having to overcome the already-mentioned institutional barriers to market creation in developing and emerging countries. The original business model was heavily reliant on the Egyptian government’s support for solar energy. When the feed-in tariff terms were revised and the Egyptian pound was floated, the original business model lost its foundation. Enabled by the new net metering scheme, Masar pivoted toward serving business customers in Egypt. Although this minimized the influence of political barriers, this maintained—if not increased—the financial barriers, as Masar could no longer rely on the Egyptian government to pay for the electricity generated. The startup needed to find a way to make electricity affordable for businesses and to raise funds from international investors for the panels. As international investors were not willing to invest, Masar moved toward a container-based business model that was designed to overcome political, financial, and indigenous resource barriers. There is a clear linkage between technological innovation and barriers to market creation, as exemplified in Table 11.2. The case provides empirical evidence for a dynamic approach to designing business models (A-G and Mustonen, 2017). The case reveals how the company is embedded in the business environment, constant change, and technological development. Thus, it highlights the networked nature of business relationships, as well as strategic agility, adaptability, and flexibility. In addition, the case recognizes the role of institutions in value co-creation (Vargo and Lusch, 2016). Hence, a revised definition for the dynamic approach to business models is given. The new definition is compatible with both the empirical case as well as S-D logic: the dynamic approach to business models entails a flexible and adaptive attitude towards the company’s business model to reconfigure, develop, and adapt the model in response to events, institutions, and institutional arrangements in systems of value co-creation: service ecosystems. Masar’s business model has been constantly adapted, a process influenced by various market actors, and, although it is less reliant on political actors than its original model, it is still influenced by political decision-making. Government subsidies (and subsidy cuts) do affect the competitiveness of solar energy

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TABLE 11.2 Technological innovations used by the case company to overcome barriers to

market creation Barriers to market creation

Technological innovations to overcome the barriers

Political barriers

Masar Box enables the relocation of the solar power plant. If political risks (e.g., devaluation of the national currency, changes in the feed-in tariffs, security) actualize, it is possible, in the worst case, to ship the solar power plant to another country. This is much more challenging for roofor ground-mounted solar power stations. Mobility of Masar Box enables leasing of the solar power plant. If the client does not pay for the lease, it is possible, in the worst case, to ship the solar power plant to another client. This is much more challenging for roof- or groundmounted solar power stations. Masar Box minimizes the need for indigenous resources. As the system is prepackaged and can be remotely monitored, there is no need for local expertise. Roof- and ground-mounted solar power stations need more expertise for installing the system.

Financial barriers

Indigenous resource barriers

compared to diesel. In addition, the study shows how Masar’s business model also relies on the expertise of business partners, in a network business approach. The company is a member of business networks such as the Telecom Infra Project, which aims to change the institutional environment and provide an additional resource basis for business model development. Potential financiers were important in shaping Masar’s business model, as it was necessary to have a solution that matched the needs of both local customers and international financiers. Investors are still comparing the containerized solution against the LCOE of ground- and roof-mounted systems, and the case demonstrates how technological innovations are still closely interlinked with market innovations (Wieland et al., 2017). New technologies require new market practices, which makes it important to engage other market actors. The Masar case adds an institutional dimension to Kaartemo et al.’s (2018) proposition that resource integration and value propositions become market offerings if they are agreed upon by market actors. The willingness of market actors to accept value propositions and to integrate resources (e.g., to finance a container or to sign a lease) depends to a large extent on the institutional arrangements (or barriers) in a given context. In brief, if companies hope to make value propositions attractive to market actors, they

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need to either develop value propositions that fit the institutional environment or engage in institutional work to change these institutional arrangements.

Conclusions As a contribution to the business model literature, this is the first empirical study to describe a dynamic approach to business models (Nyström and Mustonen, 2017). Masar relies on a series of actors in its business model, such as partners developing containerized solar power plants, solar panels and batteries, as well as ubiquitous internet services. Its business model is also influenced by public actors, as governments in Africa can either provide opportunities to businesses or limit their operations. As an active member of key business networks, Masar attempts to alter the institutional environment and secure additional resources for its members. Thus, the study extends the original work of Nyström and Mustonen (2017) by integrating the role of institutions and institutional arrangements into business model transformation. It also provides empirical evidence of how companies can experiment and negotiate with resource-integrating actors to develop value propositions that engage actors in transformed market practices. Thus, building on S-D logic and effectuation, dynamic business models can be seen as outcomes of constant experimentation with market actors. The case also contributes to the diaspora entrepreneurship literature, and particularly the opportunity-driven approach that views diaspora entrepreneurs as institutional change agents (Riddle and Brinkerhoff, 2011). The diaspora entrepreneurs are not only doing business based on necessity, but as a result of recognizing business opportunities; they are not simply constrained by institutional environments, but they can actively drive the market and change institutional arrangements together with other market actors. This study shows how institutional conditions affect the internationalization efforts of diaspora entrepreneurs (Rana and Elo, 2017). Companies need to analyze the institutional barriers relevant to their own business. Some of these barriers can be overcome through technological solutions (e.g. mobility to overcome political barriers, or prepackaging to overcome indigenous resource barriers), whereas others require the initiation of new market practices (e.g., introducing leasing options to overcome financial barriers). Often, new technological solutions and market practices are closely interlinked. In any case, it is important to understand the business models of other market actors, to ensure the viability of one’s own model (Heikkilä et al., 2015) by making value propositions that will engage other actors in market-shaping. To boost market creation and to institutionalize innovative solutions (here, a mobile solar power plant), collaboration with similar service providers may be useful, as other companies are likely to encounter similar struggles when trying to change market practices.

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Acknowledgment Financial support from the Academy of Finland (315604), Turun kauppaseuran säätiö, and Leonard Gestrinin muistorahasto is gratefully acknowledged.

Note 1 It is worth noting that the author acted as the Head of Research at Masar B.V. from June 2015 to December 2017.

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12 INNOVATIVE BUSINESS MODELS TOWARDS SUSTAINABILITY Specificities and challenges on the Russian market Anna Veselova, Yulia Aray, Anna Levchenko, and Dmitri Knatko

Introduction “Not surprisingly, the fight to save the planet has turned into a pitched battle between governments and companies, between companies and consumer activists, and sometimes between consumer activists and governments” (Nidumolu et al., 2009). Companies try to save their license for operation by meeting increasing demands over sustainability from key stakeholders and mitigating the risks that unmet expectations could cause. Besides, under the pressure of global market competition, companies have to find new ways of creating products, processes, business models. They not only include responsible operations and approaches into business processes, but also try to create extra value and extract competitive advantage from sustainable value creation which is associated with economic, social and environmental value and connected to the contribution of the company to overall sustainable development (Hahn et al., 2007; Hart and Milstein, 2003). As a result, companies invest in sustainable development in more and more innovative ways through business model innovation which “offers a potential approach to deliver the required change through re-conceptualising the purpose of the firm and the value creating logic, and rethinking perceptions of value” (Bocken et al., 2014). For the last years, business model innovation towards sustainability has become an area that draws attention from practitioners and academics due to the fact that the integration of sustainability more radically into the value creation process allows companies to build up “shared value” (Porter and Kramer, 2011) and to induce “win–win conditions” (Halme and Laurila, 2009) both for the company and for the society. Despite the fragmentariness of the research on business models for sustainability, one can identify several popular approaches that create opportunities for companies:

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to maximize material and energy efficiency, to use a closed-loop system where nothing is wasted, to offer functionality of a product rather than ownership (Bocken et al., 2014; Bocken and Short, 2016; Jackson, 2009). In this chapter we focus on the contextual peculiarities of business models used by companies that are based on the two most discussed concepts linked to the approaches mentioned above, i.e. “circular economy” (when materials are continually recycled and reused) and “sharing economy” (when products are not owned, but shared), specifying major challenges for them on the Russian market. We provide several demonstrative cases of Russian and international companies operating on the Russian market that have made attempts to become more competitive through the adoption of sustainable practices and business models. To analyze the specificity of “circular economy” business models in Russia we consider SIBUR (petrochemicals) and Avtopark No.1 “Spectrans” (waste management services); for the “sharing economy” business model, we discuss the Uber case (transportation service) on the Russian market. Though all companies demonstrate significant positive results, they have had to overcome serious challenges from institutional resilience to the lack of proper infrastructure and economic underdevelopment in the country.

The circular economy approach and how it works on the Russian market The circular economy concept has been gaining attention from practitioners and academia for the last few decades. Initially, the concept was introduced in the 1970s (Geissdoerfer et al., 2018) within a discussion about the earth as a closed system and applicability of the rules of nature to the industrial sphere (Pearce and Turner, 1989; Stahel and Reday, 1976; Stahel, 1982). The research stream was much influenced by such topics as environmental sustainability, biomimicry, “closed loop” supply chains, re-manufacturing and related issues. Recently, the circular economy concept gained even more popularity since it has been intensively promoted by the European Union (EU Commission, 2014) and China (Yuan et al., 2006). The circular economy is an economy focused on the renewal of the resources used and designed in such a way as to facilitate the extraction of profit from the secondary use of resources. In the circular economy, products are designed so that they can be relatively easily re-used, disassembled and recycled. According to this approach, obtaining resources from products with a completed life cycle, unlike the extraction of primary resources, is the basis for sustainable economic growth. The circular economy involves a more meaningful use of resources aimed at applying the principles of the “green” economy and is characterized by new business models and approaches, as well as innovative business ideas (Ellen Mac Arthur Foundation, 2013; Stahel, 2014). In addition, one of the main objectives of the circular economy is to improve the well-being of different sectors of society and to achieve their equal access to the required resources.

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The circular economy is often considered exclusively as an approach to waste management, but this interpretation is rather limited. In addition to the introduction of “green” technologies, the circular economy involves application of a broader and more integrated approach to the design of alternative solutions at various stages of the life cycle of any process, taking into account the external environment and economic conditions. Thus, the process of regeneration involves not only the renewal of resources or energy, but also improvement of economic and social models, in comparison with those used in the traditional linear economy, to obtain significant economic and social effects. So, although the circular economy concept is oriented at environmental issues and focused on recycling and utilization of secondary materials, the real application of the concept could be much wider if we apply it to economic aspects and especially the business model perspective (Kumar and Kumar, 2013). Recently, many companies around the globe have started to realize that the linear model of resource consumption (take-make-dispose) increases their exposure to risk, primarily because of higher prices for resources, as well as interruptions in their supply. Business leaders are in constant search for a better way to hedge emerging risks and introduce new approaches and models that can effectively respond to the challenges faced by the world community on the verge of a new industrial revolution. The Russian Federation has joined the discussion on the introduction and development of circular economy principles just recently, unlike many other countries in the world where not only individual enterprises, but also cities and whole countries operate in accordance with these principles. For example, Ljubljana (Slovenia), European Green Capital 2016, is a member of the Circular Cities Network which is aimed at the dissemination of sustainable practices through a special web platform which was created to inspire the member cities to innovate in the field of zero waste and circular economy. The network also includes Boulder, Copenhagen, London, New York, Peterborough, Phoenix, Rio de Janeiro, Tel Aviv, Toronto and Vancouver which earned their membership due to their advanced approaches and experience in the circular economy (The City of Ljubljana, 2018). The lack of progress of Russia in circular principles development, first of all, can be explained by the fact that, being a resource-rich country, Russia is less conscious about ways of how to reduce resources consumption, while resourcelimited countries are forced to think more about alternative sources of resources. Secondly, lack of incentives from the local institutional environment for quite a long time has not created conditions for circular economy development in the country. Thirdly, the economic and social instability in Russia in the 1990s and 2000s drew governmental and societal attention to more acute problems. Recently, under the influence of both external initiatives (for example, the signing of the Paris Agreement within the UN Framework Convention on Climate Change in 2015 aimed at the regulation of emissions into the atmosphere) and internal pressure (for example, the problem of landfills near cities), some initiatives

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in this area have begun to appear in Russia. Although some projects have already been implemented in various Russian cities, at the legislative level circular economy initiatives are still at the very initial stage. The major legislative basis for circular economy development in Russia is the “Strategy for Innovative Development of the Russian Federation for the period until 2020” adopted in 2011 (Order of the Government of the Russian Federation No. 2227-p, 2011), the “Fundamentals of the State Policy in the Field of Environmental Development of the Russian Federation for the period until 2030” approved in 2012 (Resolution of the Council of the Federation of the Federal Assembly of the Russian Federation No. 134-SF, 2012), and the “Strategy of Ecological Security of Russia until 2025” approved by the Decree of the President of the Russian Federation in 2017 (Decree of the President of the Russian Federation No. 176, 2017). It should be noted that representatives of public authorities recognize the imperfection of Russian legislation in this area and the need for changes, in particular, in waste legislation with the purpose of creating a system for separate collection of industrial and domestic waste. Among the priorities they also distinguish the need for development of ways to maximize the recovery of useful fractions from the garbage and their further processing. In this regard, we will consider the cases of two Russian companies implementing circular economy initiatives to assess the current state of affairs and identify major trends and challenges. The first company, SIBUR, is a petrochemical company taking the leading position among competitors on the Russian market and cooperating with major players in the oil and gas and chemical industry. The second company, Autopark No. 1 “Spetstrans”, is a local monopolist in the waste management sector that makes attempts to bring sustainable principles in its activities. Both companies are involved in a sustainable value chain creation; moreover, SIBUR is located at the very beginning of the chain, while Spetstrans represents the end of the linear supply chain and, to the large extent, is responsible for closing the loop and transforming the linear supply chain into a circular one.

Circular economy principles in the Russian oil and gas sector: SIBUR’s experience SIBUR Holding1 is a gas processing and petrochemical company with a unique business model oriented at integrated work of the two main segments – fuel and raw materials and petrochemicals that are derived from the by-products of the fuel and raw material segment which requires significant additional efforts from the company, but at the same time provides consumers with high value-added products. Processing of raw materials allows the following objectives to be achieved: prevention of harmful emissions into the atmosphere as a result of APG (associated petroleum gas) flaring; creation of new products and materials, as well as provision of modern, environmentally friendly materials; export development and import substitution. SIBUR’s business model is structured in such a way that the company applies the principles of sustainable development in its activities and stimulates a circular economy

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development in at least two areas. Firstly, through the development of APG utilization projects, the company encourages oil companies to increase rationality in resources exploitation, reduce their carbon footprint and refuse APG flaring, thereby developing the circular economy principles in the context of oil production. Secondly, due to the fact that SIBUR is involved in the production of chemical products and new types of plastics, it encourages the replacement of many traditional materials produced from non-renewable resources with a high carbon footprint with new types of materials with a longer operational life cycle and possible reuse, reduced energy consumption for production and subsequent recycling. Plastics have a number of significantly beneficial characteristics in comparison to other materials: lightness, flexibility, strength, plasticity, hardness, tear resistance, resistance to aggressive environments, etc. However, the most important advantage is that they lead among other base materials by specific parameters of energy efficiency and environmental friendliness; for example, compared to aluminum plastics have eight times lower electricity consumption, and the amount of CO2 emissions is 40 times less (Remchukov, 2018). SIBUR’s activity undoubtedly creates an extremely important background for the implementation of the circular economy principles in Russia, but doing this at the stage of APG utilization, SIBUR covers only one element of a product’s value chain. After consumption, petrochemical products are delivered to landfills from where they do not return to the consumption cycle. In order to ensure the circular economy works to the full, there is a need for an appropriate supporting infrastructure, as well as companies’ readiness for changes and radical innovative solutions. Underdevelopment of the institutional environment in Russia (from cultural aspects to technological ones) is a retarding factor for the introduction of plastic recycling mechanisms. SIBUR has already launched some fragmented initiatives aimed at plastic bottles collection, for example, the campaign “The Second Life of Plastic” which is being implemented at schools (SIBUR News, 2018), the campaign for plastic bottles collection, together with the VTB United League during basketball matches; however, all of them have very limited impact due to the lack of institutions that could help with the implementation of these programs in a more systematic way and on a larger scale. Proper institutional support might contribute to the creation of a system of separate garbage collection, improvement of people’s awareness on sustainability issues, construction of plastics recycling enterprises in Russian regions, increase in companies’ readiness to purchase recycled products and many others. Currently, most of the plastics processed from petro-chemistry wastes are delivered to landfills.

Autopark No. 1 “Spetstrans”: How to survive on the Russian waste management market? The company Autopark No. 1 “Spetstrans”2 is the largest supplier of wasterelated services in the North-Western Federal District of Russia, operating in the region since 1936. Spetstrans’s key activities are related to the removal and

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utilization of solid household, municipal and industrial waste. During its existence, the company has undergone radical reorganization and expanded its activities towards some related activities such as specialized waste-related equipment manufacturing, container sites installation and maintenance, waste sorting and processing, management of a licensed landfill for disposal and utilization of waste, provision of services for the development of environmental documentation and full environmental support of enterprises. The existing waste management system in Russia is designed in such a way that only approximately 3–5% of solid wastes are sorted, while 95% are buried in landfills and 1% is burned (Figure 12.1). Moreover, standards of extended producer responsibility for recycling grow on average by 5% per year which is extremely slow (INVENTRA, 2018). Most companies prefer to pay the environment fee rather than develop recycling and reuse. The development of the waste management sector is obstructed by the lack of large-scale public–private partnership projects, suspension or cancellation of the construction of facilities for solid household waste disposal and processing, lack of subsidies and tax benefits for companies that work with wastes at various stages, weak legislative regulation, etc. However, the annual increase in the amount of domestic waste and the closure of major landfills (for example, two landfills in St. Petersburg, the second largest city in Russia, in 2014 and 2017) makes it clear that the remaining landfills can’t fully satisfy the needs as they have already been filled to the limit, and, therefore, the situation with the removal of domestic waste is at a dead end. Spetstrans has faced an acute problem and the need to change the ways of handling waste to adapt to new market challenges in order to reduce its dependence on such activities as burial. The landfill site, where 90% of the waste collected by the company is buried, will exhaust its capacity in 3–4 years. In the search for potential solutions, the company is considering various options for the introduction of circular economy principles into its operations and the subsequent changes into its business model. Thus, the company is considering the production of compost, fuel and energy from wastes, as well as offering secondary raw materials. For example, today, the problem associated with unselected fractions of plastics is partially solved through the development of the technology of high-calorific fuel production from

sorted wastes

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wastes buried in landfills burned wastes

FIGURE 12.1

Waste management system in Russia

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RDF/SRF wastes, including the stimulation of a stable demand for these fuels from various industries (cement industry, heat and energy production and others). Moreover, highly promising initiatives for diesel production from RDF wastes are actively being developed today. However, most of the company’s attempts in this area are stuck due to existing institutional difficulties in the Russian waste management market. The lack of preliminary sorting of wastes by the population, which reduces the quality of recycled material and compost, low involvement of manufacturing companies in the search for recycling solutions, underdevelopment of markets for recycled raw materials – all contribute negatively to the development of circular economy principles in the field. To overcome these obstacles, the company needs to carry out systematic, large-scale institutional changes, and, most likely, their implementation will be possible only through the close interaction of different stakeholders. It should be noted that, of course, Russian companies, including those whose activities are described above, often do not have experience in implementing projects related to circular economy principles, so one might assume that the challenges with these projects are caused precisely by this fact. However, many foreign companies, such as Coca Cola, Ikea, Duracell, operating in Russia and being leaders in implementing the principles of sustainable development, in general, and circular economy, in particular, face similar problems on the Russian market. Based on their experience in other countries, these companies are also trying to develop and implement in Russia the initiatives aimed at being involved in the circulation, processing and further use of materials and components that are production wastes of the products they create; however, these initiatives are still very fragmented mostly due to the institutional barriers that hamper the large-scale implementation of circular economy principles.

The viability of sharing economy models in the Russian context According to a PwC estimation, the world market of the sharing economy could reach USD 335 billion by 2025. According to the data of the European Commission, the volume of transactions within the sharing economy in the European Union reached €28 billion in 2016, while the Russian Association for Electronic Communications reported the volume of the sharing economy in Russia was much less, just a bit over €3 billion (Sharing Economy 2017 – Russia Round Table, 2017). Sharing economy (shareconomy, collaborative consumption) refers to the acquisition, transfer or sharing of access to goods and services, organized directly between two consumers and coordinated through online services such as networked communities (Hamari et al., 2016). Despite the fact that the phenomenon of collaborative consumption attracts the attention of various groups of stakeholders, i.e. sellers, consumers, investors, various institutional agents, it is rather difficult to give a clear and precise interpretation of this term. There are no clear criteria for identification

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of such an activity as collaborative consumption; therefore, it is not always clear why some services, for example Airbnb, are related to collaborative consumption, while others, for example, traditional B&B hotels, are not. The major feature of such models is based on non-ownership, but rather temporary exploitation of a particular asset by the user. The increasing popularity of the concept is stimulated by a number of reasons. First of all, an economic effect is obvious for both parties involved in collaborative consumption. One party obtains financial benefits from an asset that is currently “excessive”, and the other party receives an asset at a lower price. Back in 2013 Forbes estimated the amount of revenue received directly by people involved in a collaborative consumption model at more than USD 3.5 billion, while the expected growth was 25% per year (Geron, 2013). The sharing economy has a focus on the sharing of underutilized assets, monetized or not, in ways that improve efficiency, sustainability and community (Rinne, 2017). According to the research conducted by the Russian Association of Electronic Communications together with PBN Hill + Knowlton Strategies in 2017, “sharing economy” is a new economic model that is revolutionizing the consumption of goods and services which is having a number of important effects, including shifting of consumer behavior from buying to sharing, cutting out the middleman between a client and a service provider, and highlighting the role of online reputation and self-regulation. (Sharing Economy 2017 – Russia Round Table, 2017) The sharing economy, as it is, has appeared in Russia considerably recently. Nowadays, the most popular and successful sharing economy companies are transport platforms such as Uber, its Russian counterpart Yandex.Taxi, Delimobile, YouDrive and others. During 2016, about 500 thousand trips per day across Russia were ordered through the Yandex.Taxi service; about 170 thousand trips per day through the Uber application; and about 150 thousand trips per day through Gett application (Balashova et al., 2017). One Delimobile car is used by about ten people per day, so the total number of users of this system is more than 180 thousand people (Gorokhova and Irinina, 2017). Despite these trends for growth and the development of sharing economy companies, there is still a gap in the proper institutionalization of such activities; in particular, there is no fixed term for the sharing economy, or collaborative consumption, in Russian legislation. The use of collaborative consumption models in Russia is regulated by either very general legal acts or very fragmented regulatory norms. According to the Ministry of Digital Development, Communications and Mass Media of the Russian Federation, the economy of collaborative consumption does not need specific regulation, and the regulation that is applied on the industry level is sufficient; however, around 75% of users argue

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that if there were specific legal regulation of sharing economy services it would increase their trust (Le, 2017). The basis for UBER’s3 business model success in most countries is the lack of need to pay for a taxi license. For example, in New York the number of taxi licenses is limited to only 13 000 and they are costly, which has led to an increase in the cost of services. The possibility of attracting car owners allowed significantly reduced costs of the service and very quickly increased the market share. In Russia, there are no requirements for individual licenses for taxi drivers; the legislation regulating transportation in Russia is generally favorable for the development of the industry. Moreover, UBER was not the first online aggregator in Russia; before it came to the Russian market there had already been several companies, including such leaders as Yandex.Taxi and Gett. Acting as aggregators, these companies used cars that had received special branding decorations which meant that consumers of the service did not notice any difference between an online aggregator and a taxi company having its own car park. UBER came to the Russian market with the idea of attracting car owners willing to have additional earnings. However, Russian legislation did not allow the implementation of such an approach in a straightforward way. So, UBER had to attract partners (dispatch services) instead of working directly with drivers. Dispatch services get all the necessary equipment and applications from UBER and distribute them among drivers. They also search for the drivers and are responsible for subsequent communication with them. The terms of partnerships do not oblige these dispatch services to attract only those drivers who are registered as individual entrepreneurs. Often there is no legal written (labor) agreement between the company and the drivers, so other types of agreements are applied (intermediary contract, service contract, etc.). Having received payment for the trip minus the 20% kept by UBER, the partner transfers the payment to a driver’s banking card/account keeping some fee for dispatching services. Thus, the main burden of paying taxes (6% of profit) lies with the Russian partners of UBER. A driver must pay personal income tax of 13% on him/herself or register as a partner. This scheme led to the fact that UBER’s business model became identical to those of leading Russian online aggregators, except for the availability of the same type of cars. As a result, in July 2017 Yandex and UBER signed an agreement and merged their businesses for trips bookings in Russia, Azerbaijan, Armenia, Belarus, Georgia and Kazakhstan. The partners agreed to create a joint company, in which UBER invested USD 225 million in exchange for 36.6% of shares, while Yandex invested USD 100 million for 59.3% of shares, and another 4.1% of shares are owned by the management of the new company. Though at the moment growth rates of sharing economy companies show significant positive trends, there are several significant features of the Russian market that create challenges and might slow down its further development; among these are: stable demand for sharing economy models is only in large cities; overall poor understanding of renters about potential financial risks and

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consequent distrust of the service which leads to the need to insure these risks; self-responsibility of users for paying taxes on income which often leads to nonpayment; the lack of a special regulatory basis for the sharing economy. The main risk for sharing economy models on the Russian market, as well as worldwide, is a decrease in the overall demand; however, due to the change in the consumption paradigm, consumption through sharing is expected to reduce less substantially than through ownership, which gives incentives to develop and introduce such business models in other business areas.

Conclusions As emerging countries usually face severe ecological problems such as land degradation, deforestation, water resource depletion, greenhouse gas emissions and loss of biodiversity, they urgently need to implement approaches that could prevent such deteriorating conditions. However, companies operating in these countries that have aspired to introduce business models for sustainability often face certain problems caused by institutional environments and economic conditions. Summarizing the above, we could conclude that there is a full set of factors that are decelerating sustainable development in Russia which include: • •

•

• •

Technological ones (for example, the lack of necessary sorting lines that allow household waste to be sorted); Regulatory ones (currently implemented measures are only the first steps in the right direction, and they are not sufficient for the full functioning of the circular economy in Russia, standards and environmental fees for enterprises are still insufficient); Economic ones (for example, the lack of appropriate state support aimed at stimulating deep waste recycling, rather than depositing waste in landfills, also requires the availability of appropriate physical infrastructure for sampling and sorting of polymer waste); Cognitive and cultural ones (for example, the lack of practice and tradition of conscious consumption, the lack of the culture of separate garbage collection, environmental ignorance of the population); Infrastructural ones (the absence of interregional schemes for waste management, creation of enterprises throughout the country involved in recycling).

Notes 1 SIBUR is the largest (27 000 employees) integrated petrochemicals company in Russia founded in 1995 and headquartered in Moscow. SIBUR operates with feedstock, which is produced by the Midstream segment using by-products purchased from oil and gas companies. The company has customers engaged in the chemical, fast moving consumer goods (FMCG), automotive, construction, energy and other industries in 80 countries worldwide. SIBUR sells petrochemical products on the Russian and international markets in two business segments: olefins & polyolefins (polypropylene,

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polyethylene, BOPP films, etc.) and plastics, elastomers and intermediates (synthetic rubbers, EPS, PET, etc.). In 2017, SIBUR reported revenue of USD 7.8 billion and adjusted EBITDA of USD 2.9 billion (Sibur, 2018) 2 Avtopark No.1 “Spectrans” JSC has been the largest provider of waste management services in the North-West Federal Region of the Russian Federation since 1936. The number of employees is about 1100 people. Avtopark No. 1 “Spectrans” is a waste operating company that provides the full specter of quality solid waste services – transporting, sorting, recycling. The key business involves 400 owned trucks, small waste sorting and recycling factory, own landfill. The annual turnover of waste that the company collects is around 4.3 million cubic meters which accounts for 43–45% of all solid waste in the region (Spetstrans, 2018). 3 Uber Technologies, Inc. offers a mobile application that allows users to arrange and schedule transportation. The company receives ride requests through the application and then sends these requests to drivers who provide customers with transportation services to their final destination. UBER was founded in San Francisco in 2008 by Oscar Salazar, Travis Kalanick and Garrett Camp. The company is fast-growing; it operates in 77 countries (616 cities worldwide), has over 16 000 employees and revenues of USD 7.5 billion in 2017 (Forbes, 2018).

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Gorokhova A., Irinina Y. (2017). Perspectives of Sharing Economy Development in Russia [Perspecktivy Razvitiya Ekonomiki Sovmestnogo Potreblenia v Rossii]. Bridges, 10 (3). https://ru.ictsd.org/bridges-news/ (in Russian). Hahn T., Figge F., Barkemeyer R. (2007). Sustainable Value Creation Among Companies in the Manufacturing Sector. International Journal of Environmental Technology and Management, 7 (5/6), pp. 496–512. Halme M., Laurila J. (2009). Philanthropy, Integration and Innovation? Exploring the Financial and Societal Outcomes of Different Types. Journal of Business Ethics, 84, pp. 325–339. Hamari J., Sjöklint M., Ukkonen A. (2016). The Sharing Economy: Why People Participate in Collaborative Consumption. Journal of the Association for Information Science and Technology, 67 (9), pp. 2047–2059. Hart S.L., Milstein M.B. (2003). Creating Sustainable Value. Academy of Management Executive, 17 (2), pp. 56–69. INVENTRA (2018). Wastes Recycling 2018. URL: www.creonenergy.ru/consulting/detail Conf.php?ID=125275 (in Russian). Jackson T. (2009). Prosperity without Growth: Economics for a Finite Planet. Earthscan, London. Kumar N., Kumar R. (2013). Closed Loop Supply Chain Management and Reverse Logistics – A Literature Review. International Journal of Engineering Research and Technology, 6 (4), pp. 455–468. Le I. (2017). Ministry of Communications and Mass Media Opposed a Separate Law for Uber-type Services. URL: www.rbc.ru/technology_and_media/19/10/2017/59e88cb69a7947b0 c193ec7d (in Russian). Nidumolu R., Prahalad C.K., Rangaswami M.R. (2009). Why Sustainability is Now Key Driver of Innovation. Harvard Business Review, 87, September, pp. 57–64. Order of the Government of the Russian Federation No. 2227-p. (2011). Strategy for Innovative Development of the Russian Federation for the Period until 2020. URL: http://gov ernment.ru/docs/9282/ (in Russian). Pearce D., Turner R. (1989). Economics of Natural Resources and the Environment. Johns Hopkins University Press, Baltimore, MD. Porter M.E., Kramer M.R. (2011). The Big Idea: Creating Shared Value. Harvard Business Review, 89, pp. 2–17. Remchukov M. (2018). SIBUR – Green Strategy: Environmental Friendliness and Effectiveness of Plastics. URL: http://interplastica.ru/files/interplastica/121637/24-01/maksim_rem chukov__sibur.pdf (in Russian). Resolution of the Council of the Federation of the Federal Assembly of the Russian Federation No. 134-SF (2012, April 30). Fundamentals of the State Policy in the Field of Environmental Development of the Russian Federation for the Period until 2030 (2012). URL: http:// kremlin.ru/events/president/news/15177 (in Russian). Rinne A. (2017). What Exactly is the Sharing Economy? World Economic Forum. URL: www.weforum.org/agenda/2017/12/when-is-sharing-not-really-sharing/ Sharing Economy 2017 – Russia Round Table (2017). URL: http://hk.cdnist.com/wpcontent/uploads/2017/10/PBN_HKS_Sharing_Economy_2017_EN.pdf Sibur (2018). Who We Are. URL: www.sibur.ru/en/about/overview/ SIBUR News (2018). Within SIBUR’s Project “The Second Life of Plastics” Pupils from Tobolsk Collected More than a Ton of PET bottles. URL: www.sibur.ru/siburtobolsk/ press-center/news/v-ramkakh-proekta-sibura-vtoraya-zhizn-plastika-shkolnikitobolska-sobrali-bolee-tonny-pet-butylok/(in Russian). Spetstrans (2018). About the Company. URL: http://spest1.ru/o-kompanii/ (in Russian).

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13 E-WASTE AND SUSTAINABILITY IN A CHANGING ENVIRONMENT A Behavioural Economics approach Xavier Pierroni

Introduction: the e-waste E-waste is the fastest growing waste stream (Sun et al., 2016) due a combination of increase in electronic product shipments and stagnation of collection and recycling rates, despite having one of the most advanced WEEE1 legislations and dynamic, open markets for second-hand products. In 2016, more than 45 million tonnes of e-waste were generated (United Nations University, 2017). Mobile and smart phones only weigh a few hundred grams at most and individually they now surpass the number of humans on earth with an estimated 7.2 billion devices in activity (The Independent, 2014). Close to two billion mobile and smart phones were shipped in 2017, and in 2013 smart phone shipments outpaced mobile phones. Whilst sales tend to remain stable, smart phones now represent 75% of mobile shipments from just a fraction in 2008 (Figure 13.1). The ubiquitous nature of electronic handsets contributes to high ownership levels, and this contributes to a “hoarding” behaviour. Silveira and Chang (2010) evaluated that 50 and 90 million devices were stockpiled worldwide. The Ellen McArthur Foundation (2012) estimated that 10–15% of mobile and smart phones are recycled. Accurate figures are difficult to obtain, but the most optimistic estimate is that 20% are recycled in the UK (Green Alliance, 2015), whilst in the United States of America (USA), the Environmental Protection Agency’s estimate is more conservative at 10% (US EPA, 2013). The increase in global shipments and low recycling rates means that several hundreds of millions of mobile and smart phones most likely end – unnecessarily –

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Mobile and smart phone global yearly shipments in millions of units

(Source: Gartner, 2018)

in landfills. It was estimated in 2010 that more than 130 million mobile phones were discarded in the USA (Coalition, 2014). E-waste is considered the fastest growing solid waste segment. In 2016 44.7 million metric tonnes of e-waste were generated worldwide – the equivalent of 4,500 Eiffel towers, up 8% from the previous year (United Nations University, 2017). “E-waste is a term used to cover items of all types of electrical and electronic equipment (EEE) and its parts that have been discarded by the owner as waste without the intention of re-use” (Step Initiative, 2014: 4). E-waste failing to enter the recycling chain either goes to landfill with potentially adverse environmental consequences, or is incinerated, failing to produce any financial or material value. When WEEE is disposed of alongside nonhazardous waste and taken to landfill, metals, plastics and fire retardants can cause environmental contamination (Barba-Gutiérrez et al., 2008). Disposing of WEEE in landfill also means raw materials used in the production of EEE are lost (Oguchi et al., 2008), instead of being recovered and reinserted into a closed-loop system. Other issues include the adverse environmental and health impacts when WEEE is sold illegally to developing countries, where health and safety regulation is lacking and the labour force is poorly trained (Robinson, 2009). The effects on human health are still not well understood; however, the Chinese town of Guiyu and Accra in Ghana are well-known case studies (Daum et al., 2017). These cities are the e-waste recycling capitals of the world (Li et al., 2015). Currently researchers have noted the very high concentration of highly toxic pollutants in the surrounding soils and water (Milovantseva and Saphores, 2013). Song

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and Li (2015) have investigated the presence of heavy metals in human tissue of people living and working in unregulated e-waste sorting facilities in China. E-waste represents an environmental challenge but also an opportunity for countries with limited strategic and critical materials availability. According to the European Commission (2010), critical materials are defined by their economic importance and their supply risks due to political risk. Substitutability of the materials and recycling rates are also considered. For example, when a raw material has been identified as critical, it means its supply is almost impossible within the EU and its supply chain outside of the EU could be compromised in the future due to geopolitical reasons or distortions between offer and demand (European Commission, 2010, 2014). In 2010 the European Commission (EC) released a report on Critical Materials for the European Union (EU), identifying 14 out of 41 non-energy and non-agricultural materials vital for the EU economy associated with high supply risk disruptions. In 2014, an update of the report included 20 materials out of 20, with only one from the previous list being dropped. The Oko Institute (2011) acknowledges that more efforts on collection rates and recycling technologies must be devoted to achieving sustainable goals in Europe. Leading Japanese manufacturers such as Mitsubishi and Toyota have started vast Rare Earths recycling programmes from batteries, magnets and low energy light bulbs (Toyota, 2014). EEE that eventually becomes category 3 WEEE uses minute quantities of Rare Earths Elements (REE) – compared with electrical cars or wind turbines; however, the mass recycling of these products could generate a substantial amount of REE (UNEP, 2011), given the hundreds of millions of devices unused or discarded (Alamgir et al., 2012). REE extraction from mobile and smart phones is economically feasible if implemented on a very large scale. Only minute amounts of REE can be retrieved from each device. The now defunct South Korean Economic Institute (SERI) estimated in 2011 that in South Korea alone, 85,000 tons of Rare Earths oxides were available within South Korean borders, if REE could be retrieved from recycled e-waste (Korea JoongAng Daily, 2011). This is of particular importance as South Korea does not have direct access to REE and relies on imports from China and Japan. If these resources could be tapped into through recycling it would represent more than 20 times South Korea’s annual consumption. SERI was one of the first institutes to encourage urban mining to sustain strategic supplies of materials. In September 2010, China halted shipments of REE to Japan, its largest customer, amid a diplomatic row (Bloomberg, 2010). Rare Earths Elements are used to manufacture electronics and green technology products such as hybrid cars or wind turbines, with China producing 97% of these materials (Massari and Ruberti, 2013). Not only did REE prices surge (Bradsher, 2014) but the European Commission, the USA and other advanced economies expressed deep concerns over the supply of these materials and subsequently placed them on their critical lists (European Commission, 2010; US Department of Energy, 2010).

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The World Trade Organisation (WTO) eventually ruled in 2014 that China had unlawfully halted REE shipments and breached its WTO obligations. China did not appeal against the decision (WTO, 2014). Hence e-waste is both an environmental threat and a resource access opportunity that might still be underestimated, perhaps due to the inherent difficulties of collecting small e- waste and subsequently processing it to secure specific resources. Electronic waste legislation has been updated to adapt to societal changes, but will that be enough to continue the transition towards a circular economy.

Urban mining and circular economy Urban mining is the process of reclaiming compounds and elements from products, building and waste. It is a useful construct that facilitates an assessment of secondary materials stocks within an urban environment since it delimits an area in which the type/amount of materials accessible at a fixed point in time can be recorded. In this context, the concept of accessibility is expressed by the overlapping of available materials and their approachability (Mueller et al., 2017). These estimates can then be used to measure the investments necessary to retrieve materials. “WEEE is the backbone stream in urban mining” (Cossu and Williams, 2015: 3). Yao and Steemers (2009) have specifically studied small household appliance (WEEE category 2) ownership levels. Ongondo et al. (2015) have estimated WEEE stocks and flows within a university’s campus and proposed the concept of Distinct Urban Mines (DUMs). DUMs are not only defined by their delimited space within the anthroposphere but also by the potential availability and accessibility (Mueller et al., 2017) of resources for a given type of EEE. For a specific UK university DUM rich in EEE category 3 (IT and telecommunication equipment), it has been estimated that 107 tonnes of secondary materials could be exploitable at a certain point in time (Ongondo and Williams, 2015). To be exploitable, a mine (urban or not) needs to be economically viable and located within reach of an existing logistics network with materials concentration at an optimal level (Zhang and Kleit, 2016). Therefore, a DUM is a valid concept to evaluate: (i) the potential to secure secondary resources from within the anthroposphere and (ii) the possible cost-efficient methods that could be implemented to access them. As of 2016 in the EU, the Waste Electrical and Electronic Equipment (WEEE) recast directive requires Member States (MS) to collect the equivalent of 45% of EEE placed on the market during the three previous years (Directive, 2012/19/EU). This target will rise to 65% in 2019 or 85% of WEEE generated. The EU’s Extended Producer Responsibility (EPR) framework places incentives on producers to collect WEEE. In the UK, EEE producers are required to take part in Producers’ Compliance Schemes to finance WEEE collection and treatment. Organisations selling EEE to consumers are EEE distributors and those manufacturing EEE are producers.

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In addition, Distributors need to offer free in-store take back services. EEE distributors can opt out of free in-store take-back systems by joining a Distributor Take-back Scheme (DTS), which requires a fee proportional to the amount of EEE sold annually. These collection systems are designed to channel back any type of WEEE into the circular economy: broken as well as unbroken and unwanted EEE (UEEE). The circular economy concept emerged from a vision of an economy in loops (Stahel, 1977). This concept resurged recently with growing concerns over environmental issues and resource scarcity (Singh and Ordoñez, 2015). The circular economy framework is now at the core of the European Commission’s (EC) long-term strategy with the adoption of the Circular Economy Package strategy for a resource-efficient Europe (COM/2015/0614). It follows a cradleto-cradle approach from the beginning of products’ life to waste recycling (plastic, food, construction and demolition), as well as advocating reduce and reuse. The package also includes aspects relevant to the supply of critical raw materials, which has been a source of concern over recent years (WTO, 2014). Ambitious common targets have been set for all MS for waste and packaging recycling. The EC has also set an action plan between 2016 and 2019 to help achieve these objectives. WEEE is a potentially sustainable source of plastic, metals and critical materials which could provide a long-term supply of secondary materials (Dirk et al., 2013). The European Commission reiterated its support towards a circular economy with the WEEE recast in 2012 by setting targets better adapted to business realities and reducing the administrative burden of compliance (Department for Business, Innovation and Skills, 2013). Creating legislative frameworks has motivated EU Member States to progress from approximately 2.5 kg of WEEE collected per year per inhabitant in 2005 to more than 7.6 kg in 2016 (Figure 13.2). Forty-five percent of Placed on the Market POM represents 11.6 kg per inhabitant in the EU and Huisman (2010) calculated that a 65% of EEE POM in 2016 would equal to 16.7 kg. Moving from weight-based targets towards quantity-based targets is an improvement. EEE product weight is constantly dropping, especially for small WEEE, making weight-based even less relevant. Another aspect arguing against weight-based evaluation is the association of minute quantities of REE to improve electronic performances for EEE (Eliseeva and Bünzli, 2011). This increases the potential value of WEEE whilst it increases the entropy of the system. In addition to strategic governmental efforts, private entities and business have taken proactive steps to harness their efforts towards a common goal. The Ellen McArthur Foundation (Ellen McArthur Foundation, 2018a) and its association to McKinsey & Company, a consultancy, have been instrumental in building awareness and linking theory to practice. In addition to showcasing efforts from private organisations, they engage government and large corporations such as Cisco to commit to sustainable development. An example of applied circular economy from the Ellen McArthur Foundation (2018a) is Re-Tek. The organisation employs 32

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EU average WEEE collection per inhabitant per year

(Source: Eurostat, 2016)

people in the UK and specialises in refurbishing and reselling Internet Communication Technology (ICT). It processed 170,000 devices in 2016. The Green Alliance (2015) estimates that used and refurbished smart phones will have reached 257 million in 2018, from 53 million in 2013. However, Deloitte (2018) estimated the number of refurbished phones would be set at 140 million units. Nevertheless, to achieve these ambitious top-down targets set by the WEEE Directive recast by 2019, other complementary elements stemming from bottom-up initiatives are necessary to capture efforts from all directions. In general, the larger in size the UEEE or WEEE, the more likely households will arrange for distributors to take back their washing machines, fridges or TVs as keeping them at home takes up valuable space for an item with limited usefulness, especially if broken. If items are unbroken, householders have the possibility to resell or give them away, but the prospect of managing this process could be perceived as cumbersome and the benefits of having large UEEE removed for a small fee is appealing to households. However, for small UEEE (sUEEE), such as mobile or smart phones, users might keep them as they might be useful in the future, either as a replacement or for other reasons. To better understand these end-of-use decisions, behavioural models stemming from psychology could be used.

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E-waste end-of-use behavioural models to improve the circular economy Behavioural models are gradually built on the successes and limits set by previous models. Fishbein and Ajzen (1975) and Ajzen (1985) have developed models based on psychological principles: Theory of Reasoned Action (TRA) and Theory of Planned Behaviour (TPB) respectively. They are based on intrinsic motivators such as beliefs, attitudes, intentions, social norms, awareness of consequences. Recent developments have indicated that models associated with emotions, feelings and desires reached higher levels of statistically explained variability than models using TPB and environmental factors. The common denominator between these studies is the use of the TPB. Studies use TPB factors as the core and explore other variables of interest depending on the study focus. The field of psychology that is associated with consumer behaviour has been used in the past to attempt to predict recycling behaviour. In 1975, Fishbein and Ajzen published their seminal paper on the theory of reasoned action (TRA) using beliefs, attitudes and intentions to predict human behaviour (Figure 13.3). The framework associates attitudes towards the act with intrinsic motivators such as subjective norms to determine behavioural intentions, which the researchers believe translate into behaviour. To reduce the TRA’s gap between intentions and behaviour, Ajzen (1985) added perceived behavioural control (PBC) to attitude and subjective norms, resulting in the Theory of Planned Behaviour (Figure 13.4). PBC is the perception of the ease or difficulty of the specific behaviour, which mitigates or enhances the perception towards a behaviour and the social pressure to execute (or not) an identified behaviour (Ajzen, 1991). In this framework, the notion is that control enhances behaviour as skills, abilities, knowledge and adequate planning are added (Davies et al., 2002). Individuals assess potential actions against their consequences and perceived value; the decision-making process is influenced by the “acquisition, evaluation, execution and interruption of abstract actions” (Balleine et al., 2015:2). But behaviour is difficult to predict accurately

Attitude towards behaviour Behavioural intention

Behaviour

Subjective norm

Theory of Reasoned Action and factors influencing intentions (Redrawn after: Fishbein and Ajzen, 1975).

FIGURE 13.3

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Attitude

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Intention

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Perceived Behavioral Control

Theory of Planned Behaviour and factors’ influence on intentions and behaviour (Redrawn after: Ajzen, 1985). Solid lines represent a more consistent influence than dotted lines on factors

FIGURE 13.4

and is an unsteady process (Bouton, 2014). Individuals tend to follow behavioural patterns but they can change their behaviours for various reasons. Therefore, anticipating accurately individuals’ actions is science as well as art, ascription of responsibility, personal norms, past behaviour and values. To date, the TPB has been widely used in a variety of fields: health-care, psychology, decision analysis, consumer behaviour (Ajzen, 2011) and waste management (Hopper and Nielsen, 1991; Davies et al., 2002; Richetin et al., 2010; Ojedokun, 2011; Chan and Bishop, 2013; Pakpour et al., 2014; Wan et al., 2014; De Leeuw et al., 2015). Despite its popularity, the model yields a wide range of explained variability in behaviour. Armitage and Conner (2001) in their TPB meta-analysis calculated that TPB accounted for 27% and 39% of the variability in behaviour and intention. Therefore, researchers tend to add variables in addition to the TPB core. In the waste and resource management field, the TPB has often been used to evaluate household waste management behaviour, albeit less frequently for e-waste. This psychological model, stemming from the TRA, seeks correlation between Attitude, Subjective Norm, Perceived Behavioural Control as well as Intentions and Behaviour. The TPB is useful to assess intrinsic motivators that could lead to an intended behaviour. But the link between intentions and behaviour is tenuous (Blake, 1999). Additional factors such as emotions have been used with sometimes more success than the TPB only, but most of these studies relied on self-reported data (Tonglet et al., 2004; Bortoleto et al., 2012; Ramayah et al., 2012). Including emotions in the theoretical framework could increase variability explained. Behavioural Economics already include decision-making biases and the influence of emotions on decisions. Therefore, the inclusion of Behavioural Economics factors to the TPB could be considered when modelling small e-waste end-ofuse decisions. More specifically, the Endowment Effect, Loss Aversion and Status Quo bias could warrant further investigation.

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The “Endowment Effect” (EE) is the overvaluation of owned objects compared with the object’s actual market valuation (Thaler, 1980). “People typically demand more to relinquish the goods they own than they would be willing to pay to acquire these goods” (Morewedge et al., 2009: 947). The EE is influenced by factors such as “status quo bias” (Samuelson and Zeckhauser, 1988) “loss aversion” (Kahneman and Tversky, 1984) experienced by owners when they foresee parting from a possession. Status quo bias is illustrated when an owner takes a decision leading to non-action, i.e. an individual tends to remain in a known situation rather than making a decision with an uncertain outcome as “the disadvantages of leaving it loom larger than advantages” (Tversky and Kahneman, 1991:198). Loss aversion is the anticipation of a potential future loss. When one foresees parting from an owned object, one projects the situation without the object and associates emotions. If these emotions are negative due to missing the object, one is averse to these negative emotions and is consequently unfavourable to the object loss. Losses equivalent to gains are perceived as more painful than the potential positive emotion associated with a symmetrical gain (Kahneman and Tversky, 1984). For example, a loss of $100 represents more negative emotion than the positive sensation for a $100 gain. The EE is associated with the pain felt when an owner contemplates parting from an owned object (Tversky and Kahneman, 1991). To alleviate the potential pain, individuals tend to overvalue an object they own to enter in a transaction. For example, according to the Endowment Effect, someone who has just acquired a brand-new smartphone, if asked to part from it immediately, they would ask for more than the device market value. This price increase would be justified to overcome the loss of an object that has been desired and the time spent to acquire it. In addition to loss aversion and status quo bias, other factors have an influence on the EE, such as time and emotional affect. The EE has been demonstrated as immediate by Kahneman et al. (1990). Individuals experience loss aversion even a few moments after an object has been acquired by a new owner and hence tend to prefer the status quo rather than trading their good. Strahilevitz and Loewenstein (1998) have demonstrated that the longer the ownership of an object, the stronger the EE. They call these phenomena the “duration-ofcurrent-ownership effect” and the “duration-of-prior-ownership” effect (Strahilevitz and Loewenstein, 1998:285). The first effect refers to the association of time and ownership. The second effect refers to lost property and the longer it was owned, the more emotionally painful the loss. The influence of time may be explained by the sentimental attachment one might have for an object (Kahneman et al., 1990). On the other hand, strong negative emotions have opposite influences on the EE; researchers such as Lerner et al. (2004) have shown that disgust actually cancels the EE and that sadness can reverse it. Based on the TPB (Ajzen, 1985), a model explaining the gap between end-ofuse intentions and behaviour is proposed (Figure 13.4). It is suggested the endowment effect, loss aversion and the status quo bias (Thaler, 1980; Samuelson and

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Zeckhauser, 1988; Tversky and Kahneman, 1991) are at work between intentions and behaviour. Users tend to overvalue their device compared with market values and would rather keep the devices as backups, rather than engaging in an “unfair” transaction. This subjective valuation compared to the device second-hand market value, triggers negative emotions, which in turn could explain the weakness between intention and end-of-use behaviour, which sits in the TPB. The endowment effect, loss aversion and the status quo bias appear to prevent users from reselling; they would rather keep the device for a potential later use. Users who still have some utility for the device, might give it away to a friend or family. Lack of convenient systems to collect the phones prevent them from recycling, and discarding options are sometimes considered but rarely implemented (10% to 15% are discarded but after a significant amount of time; Gutiérrez et al., 2010; Ellen McArthur Foundation, 2018b). Therefore, the default option (Kamenica, 2012) is to “do nothing” and stockpile the device. End-of-use decisions are to resell, give away, recycle, discard or stockpile (Figure 13.5). Stockpiling contributes to constituting Distinct Urban Mines which could be used to retrieve critical and strategic materials. Stockpiled devices represent a DUM that can be characterised by the quantity of devices stored away and the time they have been held in storage. Better understanding of DUM characteristics, such as the reasons why the devices have been stockpiled, should help in devising methods and techniques to exploit this stock. Reducing or countering the barriers that have led to stockpiling behaviour could be more precise and targeted. Management studies to explain household recycling behaviour and factors are added to increase the level of variability explained. Such factors include environmental values, altruism or demographics (Hopper and Nielsen, 1991; Davies et al., 2002; Richetin et al., 2010; Ojedokun, 2011; Chan and Bishop, 2013; Pakpour et al., 2014; Wan et al., 2014; De Leeuw et al., 2015). Aside the TPB core elements (attitude, subjective norms and perceived behavioural control), there appears to be no set of additional common factors agreed by waste management researchers as important contributors to the predictive power of the TPB. When considering mobile and smart phones end-of-use factors, “classic” waste and resource management factors don’t necessarily apply. Social pressure, ethical or altruistic values (Barr et al., 2001; Chan and Bishop, 2013) are not relevant to these small electronics. At the end of their use, owners don’t perceive them as “waste” and would rather keep them in storage than engaging in an end-of-use activity that might not fully satisfy their utility. This non-decision to engage in end-of-use activities generates DUMs that need to be exploited. Instead, efforts from organisations and government should be to counter the decision-making biases induced by Behavioural Economics to sustainably exploit DUMs composed of stockpiled devices. For waste and resource management academics, the inclusion of Behavioural Economics principles when describing electronics end-of-use behaviour could bring additional insights and opportunities to counter subjective biases in the

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Attitudes

Subjective Norms

Perceived Behavioral Control

End -of-use intention

Loss Aversion, Endowment Effect, Status Quo bias

End-of-use behaviour

Resell

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Distinct Urban Mine

Recycle

Stockpiled devices

Small electronics DUM generation model. Stockpiling decisions result in DUM generation

FIGURE 13.5

decision-making process. It could also enable the development of evidence-based new models and decision-making tools, for small or large electronics, as well as any household items that have been stockpiled. The works of Kahneman, 2002 Economics Nobel Prize (NobelPrize.org, 2018) have influenced the fields of psychology and economics (The Economist, 2019. Advances have been made into better understanding how human biases affect judgement and how these biases should be better understood to shape systems (Thaler and Sunstein, 2008). For policy-makers, and for example the Behavioural Insights Team (BIT), working in close cooperation with the British government, this implies that further work into the decision-making biases should be considered when producing

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legislation. The BIT use data science to better understand social patterns to inform social policy (BIT, 2018). For the waste and resource management policy field, this implies taking into account the households and users’ behaviour biases when designing systems aimed at improving collection rates to achieve a circular economy. With Brexit, the UK government could take back full ownership of its WEEE regulations and include CSR principles into its next WEEE recast. New WEEE legislation informed by Behavioural Economics could include CSR principles to entice EEE producers to become active members of the circular economy. For small EEE producers and producers of larger EEE as well, there is a profitbased implication to gradually transition towards a circular economy. In developed economies, electrical and electronics markets are saturated and the progression rates are low. It makes business sense to encourage these producers to shift towards a service-based business model. They have an incentive to manufacture longlasting products and can benefit from recurring stable revenues derived from leasing these products to consumers (Ellenmacarthurfoundation.org, 2018a). Consumers are more sensitive to environmental issues than ever before and smart phone markets are stalling in developing economies (Deloitte, 2018). Small electronics producers need to find value growth relays. To adapt to this evolving business context, leading small electronics producers, such as Apple or Samsung, could take an active role. They could go beyond the obligations placed by the WEEE directive (European Commission, 2012) and lead the way towards a circular economy; by switching towards a service-based business, rather than manufacturing-based. Several businesses associated to the Ellen McArthur foundation have taken active steps to accelerate the transition towards a circular economy. A prominent example is from Royal Philips in the Netherlands. They have developed a “Pay-per-lux” business model where lighting is purchased as a service and the company is responsible for maintenance, reconditioning and recovery (Ellenmacarthurfoundation.org, 2018a).

Conclusion The continuous, world-wide growth of e-waste presents a series of challenges to both advanced and emerging economies but it also comes with opportunities, as this brief chapter has shown. As discussed in the previous sections, the challenges posed by e-waste and more especially small e-waste need to be tackled with a modern, overarching and flexible approach that can be adapted to different situations and markets. Behavioural Economics have become prominent in the last decade with academics, government and corporations investigating decision-making biases to address them efficiently. The time has come for academics, professionals and institutions to investigate novel methods informed by disciplines such as Behavioural Economics to influence the design of e-waste and small e-waste collection systems and adopt a flexible approach to implement those changes.

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Note 1 In the EU, the term WEEE is often preferred for Waste Electrical and Electronic Equipment. WEEE includes end-of-life electrical and electronic appliances which are “dependent on electric currents or electromagnetic fields” (Directive 2002/96/EC). Small WEEE (sWEEE) items (smaller than 25 cm3, European Commission, 2012) are considered one of the least recycled WEEE products (Ellen McArthur Foundation, 2014). Mobile and smart phones pertain to WEEE Category 3 (Directive 2002/96/ EC) (Table 1.1).

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CONCLUSIONS Many paths to sustainability, an underlying philosophy Stefania Paladini and Suresh George

If there is anything the case studies discussed in this book have shown, it is that the road to sustainable development is long and full of challenges. Nowhere has this concept been expressed more clearly than in the UN Agenda 2030, which, together with the hurdles, also outlines what is at stake in this long and difficult ongoing process. This Agenda is a plan of action for people, planet and prosperity. It also seeks to strengthen universal peace in larger freedom. We recognise that eradicating poverty in all its forms and dimensions, including extreme poverty, is the greatest global challenge and an indispensable requirement for sustainable development. All countries and all stakeholders, acting in collaborative partnership, will implement this plan. We are resolved to free the human race from the tyranny of poverty and want and to heal and secure our planet. We are determined to take the bold and transformative steps which are urgently needed to shift the world onto a sustainable and resilient path. As we embark on this collective journey, we pledge that no one will be left behind. The 17 Sustainable Development Goals and 169 targets which we are announcing today demonstrate the scale and ambition of this new universal Agenda. They seek to build on the Millennium Development Goals and complete what these did not achieve. They seek to realize the human rights of all and to achieve gender equality and the empowerment of all women and girls. They are integrated and indivisible and balance the three dimensions of sustainable development: the economic, social and environmental. (UN’s Agenda 2030, 2015, online) This is true, especially if taking into consideration the inability of extant literature to define what can be classified as an ‘emerging market’. There are a few common

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denominators, such as: low per capita income, limited financial infrastructure, increased rates of economic growth, rising and rapid degree of industrialisation and increasing interest from advanced economies. All the progress (or lack of it) made since the Conference in Rio in 1992, the adoption of Agenda 21, and the endless debate it provoked afterwards are telling examples. More than twenty years later, many argued that Agenda 2030, adopted in 2015, was nothing but a reboot of Agenda 21, with more details and a timeline for implementation. However, what was Agenda 21’s “comprehensive blueprint for the reorganization of human society” still remains unachieved as of today, and, despite lingering scepticism regarding the reality of climate change, there is an urgency toward its implementation that did not exist in the 1990s. This is good news, and the opportunity should be seized. The thirteen chapters of the book have all highlighted a different dimension of sustainability, from the traditional approach to environmental viability of development and corporate social responsibility to the more modern views of circular economy and business innovation. A constantly evolving theme in the sustainable development literature is the dialogue around the ‘resource curse’ in many emerging economies and the dynamics around the exploitative supply chain networks in many of the extractive industries that support these economies. Although the United Nation’s SDGs are meant to alleviate some of the social and economic consequences of the extractive industries, they have often failed in many contexts. In this book, although the extractive industries are not dealt with separately, there are clear linkages to them. Perhaps one could argue that the assumption of having both economic growth as well as nurturing the national environment is not feasible. The financial dimension of sustainability has emerged as one of the most critical to assure, and the economic viability of many initiatives is often the variable that spells doom on their ultimate success. Even endeavours as ambitious and well-structured as China’s Belt and Road Initiative can prove vulnerable to it, let alone smaller and/or less centrally managed ones. And for every success story – such as green innovations in the clothing industry in many Southeast Asian countries – there are others, such as renewable energy in Africa, which suggest caution and a long-term approach. Another boundary of the sustainable development perspective is the policy driven impetus towards creating a bio economy; one based on renewable resources. In this book, we have briefly alluded to the concept by examining various aspects of how renewable resource management in the energy sector can contribute to the sustainability of the society. We have also tried to link sustainability in the energy sector to the circular economy. The need of the hour is to move beyond the contested space of ‘bio- economy’ including what a few scholars refer to as the ‘food or fuel debate’ to a more holistic interventionist model that involves both institutions, individuals, society at large and the development of disruptive technologies that can make bio-economic business models feasible.

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Yet another aspect of the sustainability conundrum which has not been examined in this book is the impact of the sharing economy on the developmental paths many of these emerging economies will take in the future. The disruptive models of the sharing economy have the potential to create more efficient use of resources, positively incorporating lower levels of consumption. The benefits of such positive disruption brought about by the sharing economy would be in its ability to offer access of ownership to the millions of people who would otherwise be denied access either by institutional voids or by economic barriers, as well as to act as a platform of information sharing, so vital to embedding the sustainability idea in emerging economies. The sharing economy also has the ability to prevent and manage wastage of food surplus by introducing alternative distribution formats that can help reduce food waste as well as generate positive social impact. Poverty and footways should be a top priority for policymakers as they are included in the SDGs. Finally, it seems reasonable to believe that it is a new way of thinking about development that has become as much embedded in policymaking as in economic theory, in an approach that combines circular economy with corporate social sustainability and business innovation respectful of social equality and climate change. Only in this way, growth would prove truly sustainable in the long run on that road the 17 SDGs have so clearly paved out.

INDEX

American 60; anti-Americanism 51; cities 97 Amway 48, 51–61 Belt and Road Initiative 5, 65, 67, 68, 69, 71, 73, 75, 77, 230 biodiversity 31, 107, 208 Brazil: energy sector 34, 37, 38, 41–43; MNE challenges 4, 32, 39; theory of dependent development 82 business models: circular economy type 8; disruptive 4; driving business innovation 7; growing discontent with existing for-profit 98; innovation 198; regeneration of natural capital 23; renewable energy market 184; transcends standard charity 27; sharing economy 208; Uber model 207 China: as emerging power 4; REE shipments 215 circular economy: behavioural models 218; and business innovation 230; impact of the sharing economy 231; principles 203, 205; in sharing economy 208; in waste management 201 competition: global 119; market 118, 141 corporate social responsibility (CSR): to build legitimacy and gain support from local stakeholders 49; engagement in emerging markets 56; liability of foreignness (LOF) 62; strategic agenda 48; strategic tool in market entry 4; and

sustainable challenges 48; WEEE legislation 223 debt: BRI and increased indebtedness of partner states 67; debt crisis in Ghana 81; debtor country 86; foreign currency debt 89; and microcredit 110; national 68; sustainability metrics of 14; unsustainable debt 73 development 6; African 125; community development finance 106; development paradigm 116; economic 82; global south–south development 123; local business 37; Millennium Development Goals 120; Multilateral Development 71; social 38; state-led developmental models 84 emerging markets 4; bottom of the pyramid (BOP) 32; CSR in 49, 56; impoverished contexts 14; key drivers 96; MNEs in emerging market 35; poverty in 32 governance: environmental and social 84; global 134, 152; good 90; governancegrowth 153; in Kenya 130; weak 85; world governance indicators 159 India: as emerging power 18; partnership between governmental institutions and private companies 50; pharmaceutical sector 47; social security and welfare 60

Index

institutions: accountable and inclusive 119; alliances with the private sector 17; collaboration between governing institutions and MNEs 14, 15, 36, 19; constraining business models 185–186; creation of 189; disrupting 187; formal and informal 9; fostering sustainability 11, 12; global transnational 118; governance of 5, 115; markets as 185; micro-finance 112, 114; and poverty 17; quality and efficiency of state institutions 26; as stakeholder-oriented financial 19, 21; and start-ups 7; state institutions 120; supranational 120; value co-creation 193; variety of 100; weakened 132 Latin America: business 102; characteristics of land ownership 97; renewable energy 184; Root Capital 95; social investment funds 97; underdevelopment in 81 marketing: bottom of the pyramid 3; contemporary thinking 188; direct 57; multi-level 4, 49, 51; network marketing companies 59; technique 22 poverty 3; alleviation 35, 38, 39; at the BOP 4; in emerging markets 32; enabling

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stakeholders and communities 21; environmental dimension 22; global 15; multifaceted phenomenon 14; nexus between business and 13; the sustainability agenda 229 renewable energy: depletion of non-renewable resource 22; funding for 38; institutional barriers 186; solutions 37 Russia: business context 8; business models 7; circular economy approach 200–202; as emerging power 4; as a resource-rich country 201; sharing economy models 205–208; specificities and challenges 199–211; waste management market 203 sustainable development goals 65 sustainability 1, 3; business models 199; cultural dimensions 25; dimensions of 14, 16; ecological 163; economic dimensions 16; environmental 22, 159; practices 174; social 96 waste management 173; recycling 180; in Russia 204 work time and consumption 165