Business for the people by the people

The ideology of ‘privatisation’ of economies and societies has advanced so much around the world in the last 30 years that the very concept of ‘economic reforms’ has become restricted to reductions in the role of government and more freedom for business corporations. There is realisation now that business corporations set up to make profits for their investors cannot be the solution to many challenges that societies must address such as increasing inequity, persistent poverty, and poor public health and education in large parts of the world. They may even be the causes of some of these problems. Neither have government-owned enterprises solved these problems very well. Therefore, new forms of enterprises must be designed to solve them.

The distance between the wealth of the richest one per cent and the wealth of the rest of the world has been increasing over the past 30 years.

Almost all the income and wealth of people at the top comes from their association with business corporations, as investors or managers, from corporate profits and stock prices, and from bonuses and salaries.

How much is enough, and do they really deserve so much? The power of corporations to influence governments and fix ‘the rules of the game’ regarding taxation, international trade, and their own regulation, is also being resented by citizens. Moreover, mistrust of for-profit business corporations that run public services such as hospitals and educational institutions, is growing in India and elsewhere too. People say that government institutions may be inefficient; but they are not greedy like the owners of private institutions.

Evolution of institutions

The history of humanity’s progress is a history of evolution of institutions enabling societies to achieve what they want. New forms of institutions of business, such as the limited liability company invented in the 17th century, enabled capital to be accumulated more efficiently to grow economies. Innovations of elected parliaments of the people enabled the implementation of ideas of democracy that societies began to aspire for since the 16th century, first in small pockets in Europe and North America, and then in a flood by the 20th century. Now new forms of business enterprises are required that will serve public purposes more democratically.

The concept of a ‘social enterprise’ that Muhammad Yunus and some others have propagated, is one such idea. It reconciles the essentials of democracy with the requirements of good economics. Social enterprises are democratic enterprises. They belong to the people, produce benefits for the people, and are run by the people. Whereas capitalist enterprises are owned by their investors, produce profits for them, and are run by their agents.

Good economics demands that an enterprise be economically self-sustaining: it’s income must cover its costs. Social enterprises do this. Whereas capitalist enterprises go much further since their success is measured by the amount of profits they produce and wealth they generate for their investors.

The success of a social enterprise is measured by the public benefits it produces: the number and quality of livelihoods it generates, or the quality, cost, and reach of the public services — healthcare, education, energy, water, etc — it provides. Social enterprises need capital to start. They can obtain it from the state or from philanthropists. While they do not produce profits for their capital providers, they produce enough economic margin in their operations to return the capital.

The resources of philanthropists’ and the state are sustained, and can be invested in more social enterprises. Thus, social enterprises are a solution that can produce much larger outcomes from the same amount of ‘charity’ money than can be produced by organisations that must rely on a continuous stream of grants and donations.

Capitalist enterprises

Capitalist business enterprises generate large amounts of wealth for their investors and top executives. Wealthy people are being pressed to give more to philanthropy and corporations to give more to CSR. The argument for reducing taxes on corporations and wealthy people is to give them incentives to generate more profits for themselves. Whereas the reduction of taxes reduces the state’s own financial resources to address societal problems, some portions of this wealth are cycled through philanthropy and CSR to address these problems. In this way, the people below become dependent on the ‘trickle down’ from the accumulating wealth at the top. Inequities are increasing because the pace of the trickle-down has not been commensurate with the pace of accumulation at the top.

The trickle-down route is much less effective than social enterprises in improving citizens’ well-being. Social enterprises enable people to stand on their own feet, reducing dependence on the charity of others. They also use all their energy to produce what people need, not distracted by the need to increase shareholder’s financial return. Moreover, they can enable the entire economic edifice to be more sustainable than it is by not draining either philanthropic or state tax resources.

The concept of social enterprises is not entirely new. Cooperative enterprises, producer companies, and so on are operating in many countries and in many industries.

Amul and SEWA in India and the Grameen organisations in Bangladesh are some examples of different shapes of social enterprises. Such enterprises are considered the poor cousins of large capitalist corporations, which they are because they produce less wealth for their owners.

These enterprises will not appear on lists of companies with the largest stock market valuations, nor will their worker-owners appear on lists of the wealthiest. However, these enterprises produce more sustainable ‘bang-for-the-buck’ impact on the lives of citizens at the bottom of the pyramid than can conventional philanthropy and CSR.

Support growth

The growing band of ‘impact investors’ (and philanthropists and CSR managers), who wish to multiply the generation of more jobs and livelihoods and produce better public services around the world, should support the growth of more such social enterprises.

And governments must ease the regulatory hindrances on their growth with even more zest than they apply to easing regulations for the growth of large, for-profit companies.

The writer was a member of the Planning Commission. Via The Billion Press

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