Professor Sarah Joseph (i)

Director, Castan Centre for Human Rights Law

Poverty, Development, Business and Human Rights

Paper delivered at the Castan Centre 'Human Rights 2005: Year in Review' conference on 2 December 2005

The Millennium Development Goals, adopted in 2000 by the United Nations and the world’s nations, committed our world to halving poverty by 2015 and making poverty history by 2025.  They set out specific targets for eliminating poverty and combating associated threats such as HIV Aids.  The world re-committed at the recent World Summit in September 2005.  Of course commitment is one thing, action is quite another.  It is trite to note that more has to be done in this regard.  I note for example that the US has spent $500 billion on the war on terror whilst in contrast it has spent $16 billion, one 30th of that amount, on the plight of the extreme poor.  However, poverty is currently a much greater threat to mankind than terrorism.  Nearly one quarter of the world’s population lives in extreme poverty, including nearly half of Africa, and poverty is of course of itself a denial of human rights.  In any case terrorism and poverty are linked, with poverty clearly being related to the sort of instability that breeds terrorism.  In this respect, I will refer to an anecdote.  Last year the Castan Centre was engaged to do some human rights training with some members of the Iraqi Ministry of Human Rights.  In one of those classes I asked them:  what did they think was the worst human rights problem in Iraq?  I presumed the answer was ‘terrorism’.  The answer, which was unanimous, was much more mundane:  the worst human rights problem in Iraq is apparently unemployment.  That stunned me a bit, and then they explained that there was mass unemployment in Iraq, which has lead to poverty.  Many people in the armed forces in particular have been laid off, and it has subsequently become a particularly good recruitment zone for terrorists.

Turning to my exact topic, I want to talk about recent developments on the role of business and foreign direct investment in development.  Private investment in developing countries has grown tremendously since 1990 and began to overtake overseas aid as a source of revenue in developing countries in 1994:  there is now a very big gap eleven years later.  Overseas aid still outstrips foreign direct investment in the least developed countries but that gap is closing.  Foreign direct investment is perhaps a more sustainable source of revenue of poverty alleviation than giving aid.  Aid is always soft money and can never be guaranteed.(ii)  In contrast the pot of foreign direct investment is potentially unlimited.(iii)  Furthermore, there is evidence that the gross domestic products of States which have attracted foreign direct investment have grown far more than those which have not attracted such investment.  Unfortunately, that increase in GDP or growth has not translated into a decrease in poverty.  Poverty measured at US$2 per day has dropped since 1990, but there has been no real difference in the numbers of people living in extreme poverty living on less than US$1 per day.(iv)  For whatever reason foreign direct investment may have increased growth but the benefits have not generally filtered down to the poorest in society.

There are various reasons for this, foreign direct investment can be isolated in a certain sector which might have very little links with other sectors.  For example in Uganda, 0.2% of foreign direct investment in 2004 went to agriculture, and that is where 80% of Ugandans are employed.(v)  So foreign direct investment has had a minimal impact on the vast majority of the poor in Uganda.

Local people simply may not benefit from a relevant investment.  For example, Freeport McMoran is the largest investor in Indonesia; it has been running a copper mine in West Papua for nearly 35 years.  It reported in 2004 that 25% of its employees were locals from West Papua.  I would say that’s not a great percentage after 35 years of a mining project.

There is also the issue of the repatriation of profits.  Oxfam reported in 2002 that 30c in every dollar invested in foreign direct investment is repatriated, and that rises to 75c in every dollar in sub Saharan Africa.(vi)

There are also examples of development with devastating impacts on people.  For example, 65% of foreign direct investment in Africa in the 1990s was in the area of resource extraction,(vii) and yet extractive operations have exacerbated conflicts with disastrous consequences for development.  For example, diamonds stoked the conflict in Sierra Leone and resource extraction has fuelled the civil war in the Democratic Republic of the Congo [DRC].    Resource extraction has unfortunately taken place in many African countries under authoritarian and corrupt governments who have plundered profits, and little has actually gone to the people of those countries.  When resource extraction in such circumstances occurs, those resources are effectively being “looted”:  that was the word used by a United Nations report on the DRC in 2001.(viii)  If they are being looted they are effectively being stolen from current and future generations of those countries, the people who are supposed to benefit from their own country’s resources.

Finally in this list of why foreign direct investment might not, in some cases, help the poor, I note that volatile investment can have devastating effects on an economy.  In 2000 there was a little noticed economic crisis in Ghana when foreign capital outflows doubled inflows.(ix)  Volatile foreign direct investment can be more damaging than no investment at all.

That’s the negative picture; I want to turn to become a bit more positive.  There has recently been a new focus to the debate regarding investment and how it may best be used to foster true development and alleviate poverty. 

In March 2004 the United Nations Commission on the Private Sector and Development issued a report called ‘Unleashing Entrepreneurship’.(x)  This report was not simply a rerun of the idea that markets should simply open up to foreign investment.  It viewed foreign investment as a facilitator of poverty alleviation rather than just an end in itself which will magically alleviate poverty.  Instead there was recognition in this report that there should be a greater focus on empowering local business, particularly small and medium sized businesses [SMEs].  These local businesses are better equipped with local knowledge to serve the needs of the poor.  For example, they have a greater understanding of local markets and consumer behaviour, what people are willing to pay and so on.  Indeed SMEs constitute the majority of businesses in the world and they account for the vast majority of income of people in developing countries.(xi)  In the past debates over the role of business and development have often excluded these players, including the huge number of informal entrepreneurs.  Instead MNCs have been deemed to be the appropriate representatives of the commercial world, and that means that the debate over development and business has been dominated by people who are remote from the relevant communities and who owe their primary loyalty to offshore shareholders.(xii)  So this United Nations report was advocating a bottom up approach focussing on the empowerment and building of the capacity of SMEs, rather than the traditional “trickle down” presumption that foreign direct investment will eventually benefit everybody. 

An example of a success story in this regard is the Grameen Bank of Bangladesh.  The Grameen Bank extends micro-credit, that is very small loans, to those without any  collateral.  It continues to focus on the poor and in particular on women as customers.  It identified that lack of access to credit is one of the main reasons why the poor cannot generate their own business opportunities.  In contrast there is certainly no lack of entrepreneurial spirit and knowledge.(xiii)  In 2005 the Grameen Bank reported a phenomenal 99% repayment rate and it estimated that 55% of its borrowers had actually crossed the poverty line.(xiv)  Its successes spawned a micro credit revolution across the world and indeed 2005 is the United Nations International Year of Micro Credit.

So where does this leave MNCs in the development picture?  Clearly foreign investors, particularly MNCs, have resources which can play an important facultative and nurturing role for SMEs.  They can help by transferring so called “business DNA”, a term coined by the Shell Foundation in a recent report referring to business know how, skills advice, technology, research and development, knowledge of and access to external markets and supply chains, and operational co-ordination.(xv)  MNCs can also draw on their “convening power”, defined by Shell as “the political and financial clout to make others listen and respond”.(xvi)  The United Nations Commission also brings up this idea:  MNCs should link with local SMEs to establish local ‘business eco-systems’ which consciously cater for local communities, including the poor within those local communities.(xvii)  For example, the bankers Citigroup and Deutsche Bank are now working with local micro credit providers to streamline resources, such as information resources regarding credit checks and administration of loans, and to provide greater capital for micro-credit operations.

That all sounds great, but why would MNCs do this? To put it another way, why would they adopt a pro poor strategy now when they have not conspicuously done so in the past?  One reason is that ‘corporate social responsibility’ [CSR] is increasingly being championed as a relevant issue for business and the international community, and so business can partially fulfil its social role by helping the poor in the communities in which they work.

Furthermore, linkage with and facilitation of SMEs makes sense from a traditional business perspective, that is profit.  Economists C K Pralahad and Stuart Hart argue that there are billions of poor at the ‘bottom of the pyramid’, two thirds of the world’s population, who are, or can become, viable consumers.(xviii)  Business has a lot to gain by acknowledging rather than ignoring the market potential of the poor.  The viability of this market is shown by the fact that the poor sometimes pay more than the rich for the same services:  the United Nations Commission found that slum dwellers in Mumbai pay 3.5 times more for water than people in wealthier suburbs and they pay 10 times more for medicine.(xix)  So surely there must be a way to structure a viable market for the poor at rates that they can afford.  It requires new types of business thinking – for example, Pralahad and Hart note that profits at the bottom of the pyramid are driven by massive volumes of sales rather than profit margins per unit sales.(xx) 

An example of a success story of an MNC tapping this market is of Hindustan Lever, a subsidiary of Unilever in India.  Up until 1995 it catered largely to India’s elite but it changed its marketing strategies in 1995 and adopted a deliberate strategy of marketing products to the rural poor. The result between 1995 and 2000 was a 25% growth in profits for Hindustan Lever;(xxi) I have no reason to doubt that that has continued.  In doing so it also provided more job opportunities to local people to utilise their knowledge to market and sell products.  Unilever has since transferred that same business model to other developing countries such as Brazil.  The ‘business eco-system’ of Hindustan Lever was reported by the United Nations Commission in 2004 as including 80 manufacturing facilities, 150 SME suppliers with 40,000 employees, 7,250 stockists, 12,000 wholesalers, 300,000 shopowners and 150,000 individual entrepreneurs, selling to around 200 million consumers.(xxii)

This emphasis on pro poor strategies might mean that MNCs want to link not only with local entrepreneurs but also with other private bodies like local NGOs to gain knowledge and to harness trust in the market.  In some instances it is also desirable to link with public partners, donors and local governments, especially for big infrastructure projects like providing water, power and other necessary infrastructure.xxiii  However, the brutal economic orthodoxy of privatisation that in the past has often just simply priced the poor out of the market must be avoided.  There needs to be recognition that there are long term investment opportunities brought by infrastructure investment.  Furthermore, a public-private partnership must ensure that it is not just structured for the benefit of the private partner.  Public-private partnerships must also benefit the public side of the equation, rather than just be a desperate measure to attract foreign direct investment.  I will note as an aside that there are even concerns about such partnerships in Australia, particularly in Sydney regarding certain toll road agreements.

Moving to my conclusion - I believe this SME strategy of MNCs linking with local businesses identifies the best role for business in improving the lot of the poor.  However, it must be part of a multi-pronged strategy for attacking poverty and generating development opportunities.  Business has a role to play but it is not a panacea to solve all development issues.  It should not be used to excuse donor states from their inadequate aid budgets, or to let international development agencies (eg the World Bank) off the hook in developing more effective strategies to combat poverty, or in excusing trade bodies such as the WTO from developing fairer trade mechanisms to facilitate a greater share of the market for developing countries.  Of course developing countries have to take responsibility themselves to avoid corruption and the squandering of resources. 

One other word of warning.  There is an emphasis in the United Nations Commission report on the deregulation of markets to facilitate foreign investment.  There should be elimination, for example, of unnecessary bureaucratic costs which cost money and increase the opportunity for corruption.  However I do not think these arguments should be used as a Trojan horse to stymie efforts to regulate companies with regard to human rights abuses.  There are of course well known examples of corporate investments which have had a terrible effect on development and human rights in general.  The fact that there is a business case for pro poor strategy, the ‘bottom of the pyramid’ argument, does not mean that business will necessarily behave in a socially responsible manner to take advantage of those opportunities.  Yet the Commission addresses this issue of corporate social responsibility in one page of its 42 page report.  The Millennium Project, reporting in 2005, again gave scant regard to corporate social responsibility and focused exclusively in this regard on the United Nations Global Compact,(xxiv) which has no accountability mechanisms built into it so it is well within the comfort zone of business.  There is no mention in either document of the most advanced attempts to establish minimum standards for corporate behaviour, the United Nations Norms of Responsibility for Transnational Corporations and other Business Enterprises with regard to Human Rights [‘the Norms’].(xxv)  There is nothing in fact in either of these reports about enforceable minimum standards at all.  Yet I would argue that corporate social accountability is a vital correlative of CSR, and indeed an important part of the maximisation of the role of business in delivering optimal development outcomes. 

One final issue here.  The Norms envisage enforceable human rights duties not only for big business but also for little business, including SMEs.  There is an expectation that eventually human rights will be enforced at all levels of business, that is not just MNCs but by SMEs across the world.  It is even envisaged that MNCs will have a role to play in ensuring good human rights practice by SMEs.  For example, they should structure their business eco systems to favour human rights respecting suppliers.  A question might arise:  is human rights enforcement in this way an external and perhaps imperialistic agenda that undermines the objective of empowering SMEs?  Is there a danger that enforcement of the Norms or human rights might strangle these SMEs and their business opportunities which we want to emerge?

I would argue ‘no’ in response to both questions, again clearly for reasons regarding good corporate citizenship but also due to ‘bottom of the pyramid’ thinking.  Human rights observance is good for the short and long term prosperity of the poor.  Adherence to human rights will build the capacity of the poor and increase their enjoyment of human dignity, and also in the language of business, their productivity and their viability as consumers.  Should we be so squeamish about transferring human rights DNA rather than just business DNA?  Indeed, as is the case with business DNA, foreign investors can not only teach local partners about human rights -they can also learn - it is a two way process.  Indeed in this regard, I note that developing countries in the UN on the Commission of Human Rights displayed a conciliatory attitude towards the UN Norms.  Developing States do not seem too worried that corporate social accountability will undermine their development.

i   A fuller version of this paper may be found at S. Joseph, ‘The Appropriate Role of Corporations in Fostering Development and Combating Poverty’, in C. Raj Kumar and D.K. Srivistata, Human Rights and Development:  Law, Policy and Governance (LexisNexis, Hong Kong, 2006), pp. 189-200.
ii  Shell Foundation, Enterprise Solutions to Poverty:  Opportunities and Challenges for the International Development Community and Big Business, March 2005, p. 26. Paper available at
iii Rodney Schmidt and Roy Culpeper, Private Investment in the Poorest Countries (North-South Institute, Ottawa, September 2003), p. 3
iv   UN Commission on the Private Sector and Development [CPSD], Unleashing Entrepreneurship: Making Business work for the Poor,, p.6.
v   North South Insitute, Canadian Development Report 2004:  Investing in Poor Countries – who Benefits? (Renouf Publishing, Ottawa, 2004), p. i.
vi  See Oxfam, Rigged Rules and Double Standards: Trade, globalisation and the fight against poverty, 2002, available via, p.178.
vii   North South Institute, above, note 5, pp. 9-10
viii   See UN Security Council, Reports of the Panel of Experts on the Illegal Exploitation of Natural Resources and other Forms of Wealth of the Democratic Republic of the Congo, UN docs S/2001/357, pp. 3, 8-9.
ix   North South Institute, above, note 5, pp. 32-33.
x  CPSD, above, note 4.
xi   D. Wheeler and K. McCague, ‘The Role of Business in Development’, 18 November 2002, originally presented at the World Bank Annual Bank Conference on Development Economics, Towards Pro-Poor Policies, 24 – 26 July, Oslo, Norway, available at, pp. 8 and 12.
xii   Background guide from the North American Invitational Model United Nations, Georgetown International Relations Association, Inc., available via  (accessed 23 November 2005), p. 1.
xiii   Wheeler and McCague, above note 11, pp 7 and 12.
xiv; see also UN Millennium Project, Investing in Development: A practical plan to achieve the Millennium Development Goals, 2005, New York, available at (accessed 23 November 2005), p.138. 
xv  Shell Foundation, above, note 2, p.12.
xvi  Shell Foundation, above, note 2, p.13.
xvii   CPSD, above, note 4, ch 4.
xviii  C.K. Pralahad and Stuart L. Hart, ‘The Fortune at the Bottom of the Pyramid’, in Strategy + Competition Magazine, Issue 26, First Quarter 2002
xix  CPSD, above, note 4, p. 7
xx   Pralahad and Hart, above, note 18, p. 5
xxi   Pralahad and Hart, above, note 18, p. 6
xxii   CPSD, above, note 4, p. 31
xxiii   CPSD, above, note 4, 23
xxiv   UN Millenium Project, above, note 13, pp. 142-143
xxv   See U.N. Doc. E/CN.4/Sub.2/2003/12/Rev.2 (2003)