Tackling Inequality is a game changer for business and private sector development (which is why most of them are ignoring it)

Oxfam’s private sector adviser Erinch Sahan is thinking through the implications of inequality for the businesses heErinchSahan interacts with

Mention inequality to a business audience and one of two things happens. They recoil in discomfort, or reinterpret the term – as social sustainability or doing more business with people living in poverty. Same goes for the private sector development professionals in the aid community (e.g. the inclusive business crowd).

A good example is the UN Global Compact, which steers companies on how to implement the SDGs. They completely side-step the difficult implications of inequality on business and redefine the inequality SDG as boiling down to social sustainability or human rights / women’s empowerment goal. All good things that we at Oxfam also fight for, but these can all happen simultaneously with increasing concentration of income and wealth amongst the richest – i.e. rising inequalityWe know that rising inequality is one of the great threats to our society and economy. So why is business and the aid world so uncomfortable with tackling it head on?

Inequality is a relative rather than an absolute measure. This often makes it a zero-sum game – to spread wealth and income more equally, someone probably has to lose. But the intersection of business, sustainability and development has become locked into an exclusive focus on win-win approaches where there are no trade-offs and everyone gets their cake and eats it too. Addressing inequality often hits the bottom line – meaning changes to the prices paid to farmers, wages paid to workers, taxes paid to government and prices charged to consumers. But there is hope. Through a new lens (or metric) that should drive how business addresses inequality: share of value.

Now that's what I call zero sum
Now that’s what I call zero sum

Don’t confuse this with Creating Shared Value, which is focused on the win-win (without commenting on how the created value is shared). What I’m proposing is a measure that compares businesses on how they share value with workers, farmers and low-income consumers. In fact the concept dates back to the original principles underpinning the fair trade movement some decades ago.

Measuring how value is shared

Consider for instance that cocoa farmers used to get 16 per cent of the value of a chocolate bar in the 1980s. Today, they get less than 6%. Let’s measure this for all products and services in our economy to answer: what value goes to workers, farmers, governments? How is it changing? Which companies share more value with the stakeholders that need it?

Or the Kenyan Tea Development Agency – a business owned by 550,000 small-scale tea farmers with 66 tea processing factories, where farmers receive over 75 per cent of the final tea price. Meanwhile, tea farmers across the border in Rwanda, without a similar business model, only earn 25 per cent. These differences are at the heart of what inequality means to business.

Measuring how value is shared rubs up against the DNA of business. It takes discussions into the negotiation room, somewhere that development or sustainability practitioners are not welcome. Beyond what’s necessary to retain business partnerships, businesses aren’t wired to leave money on the table. I certainly never did in the various sectors I’ve done business in. But how can you share more value with the very people you’re also negotiating with (directly or indirectly)?

Going into the negotiation room

Mixing sustainability and pricing feels unnatural for business. Whenever I ask a company touting their sustainability credentials (often companies sourcing from developing countries) the question “do you know if the prices you pay allow for sustainable production”, I always get a hostile response. One ‘sustainability leader’ once responded on a panel I was moderating: “we are not a charity, why would we pay more for our commodities than we have to?”

Erinch biz and inequality fig 1

Inequality is driven by business, and the robots will make it worse

The trend driving rising inequality is that value is increasingly being captured by capital rather than workers (see graph). The business world drives this trend as business-as-usual keeps squeezing value from workers. And it’s likely to get worse, with increasing mechanisation (see the alarming headlines below). I’m exploring this with one executive in a global tech company who is worried that their business model forces them to channel value to shareholders and thinks a restructuring of business may be needed if we are to avoid spiralling inequality and joblessness. Shouldn’t we promote businesses that defy this trend, before the robots take over?

If you’re doing business with people on low incomes (or affecting them in some way) – negotiating wages, negotiating farmgate prices, paying taxes, negotiating what you charge them for your product or service – then we need to scrutinise if you’re increasingly squeezing value away from them. In a nutshell, that’s how the inequality SDG relates to business.

Erinch biz and inequality fig 3 Erinch biz and inequality fig 2If business is serious about the SDGs, and understands the potential dangers of rising inequality on the stability of our world, it needs to find a way to scrutinise whether it fights or fuels inequality. Measuring share of value would be a good start.

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7 Responses to “Tackling Inequality is a game changer for business and private sector development (which is why most of them are ignoring it)”
  1. milford bateman

    Good article. But isn’t this where northern Italy-style cooperatives come in, with the members taking over the entire supply chain and thereby completely displacing individual profit-seeking entrepreneurs and companies from the whole exercise, rather than always trying to negotiate with them to ‘get a better deal’ which generally never comes off (e.g., Fairtrade). Actually, its even worse in practice since we spend so much on development programs that are all about raising the productivity of farmers, often through agricultural coops too, when the additional value generated is then gratefully appropriated by the private firms higher up the supply chain with access to the market and willing to (be persuaded to) buy from them.

  2. Erinch Sahan

    Hi Milford, yes let’s indeed cooperative ownership of the most value adding parts of global supply chains is a huge part of the answer in agriculture. Though this prioritises one stakeholder (farmers) and can be just as neglectful of other stakeholders (workers, community, environment) it certainly beats being completely beholden to rich shareholders (ie the 1%). I think the future is in developing and favouring business models that are wired up to promote interests of a broader set of stakeholders, particularly the least powerful.

  3. Narayan Manandhar

    This is an interesting article and want to inform the writer that in Nepal there is also a standard that says 75 percent of the milk produced should go to the milk producing farmers and 25 percent to the factories. I doubt this is happening.

  4. Ken Smith

    Isn’t the problem that for most of us consumers the value isn’t added by the farmers but by the multinational. So we buy the coffee not because of how it tastes but because of the millions of pounds of advertising , the celebrity endorsements , the shape of the jar. The actual coffee is becoming a smaller and smaller consideration in our buying decision so that is reflected in the weaker position the farmer has in the supply chain. I think we all need to look at ourselves as consumers , maybe like governments we get the companies we deserve.

  5. Good point Ken and yes I agree that primary production does seem to be decreasing in value for consumers. But workers across value chains are getting a smaller piece of the pie, including those in processing, as returns to capital overall continue to rise (see graph above). There are models like Cafe Direct and Divine Chocolate that result in the primary producers owning greater share in the higher value added parts of the chain (like branding and processing) and models where workers own the enterprises (e.g. John Lewis). So there are structural ways that businesses can channel the fruits of what consumers value to workers and farmers, but it means we become more deliberate about a vision for a private sector that is structurally transformed.

  6. Garth Luke

    A very important issue and I suspect one that will only be resolved through better producer organisation and action. PS Last time I looked Rwanda and Kenya were not immediate neighbours.

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