Civil Society, Corporate Accountability And The New Social Contract

Corporate Accountability Project | Thu, Jan 24, 2002

By Peter O'Driscoll

Historically, unfettered business activity has had tremendous impact on the prospects for equitable development. Left to their own devices, competitive private firms undeniably generate tremendous wealth, while driving important organizational and technological innovation. All too often, however, these achievements are tempered by the unacceptable levels of environmental degradation and social inequality that follow from liberal capitalism's tendency to concentrate wealth and increase income disparity. From the Great Depression through the 1970s, the Keynesian state sought to mitigate the adverse consequences of business activity by redistributing the private sector's income (through taxation), and by limiting the social and environmental externalities of unsustainable practice (through legislated regulation.) This balance of power between the private and public sectors, which prevailed for half of the 20th century in much of the world, constituted an unofficial ""Social Contract,"" nominally designed to balance the development goals of economic growth and social improvement.But by 1980, a series of systemic shocks had profoundly shaken this vision of the relative roles of market and state. The private sector contended that corruption, inefficiency and ineffectiveness made government an unworthy partner in the development process. Across the industrialized north, reform-minded leaders sought to dismantle the ""welfare state,"" reduce the tax and regulatory burden on business, and establish the private sector as the motor of a particular vision of development which focused on economic growth as if social improvement would inevitably follow. As for relations with global neighbors to the South, this vision translated into controversial lending and aid programs conditioned on ""structural adjustment,"" requiring reduced government spending, reorientation towards production for export markets, and increased insertion into the global economy. Summarized as the ""Washington Consensus,"" these new rules of engagement enabled the private sector to assume disproportionate power at the expense of state institutions in both northern and southern countries, and effectively dissolved the Keynesian Social Contract.However, twenty years later, the world once again seeks a new development paradigm. The Washington Consensus is faltering, fractured by the inconsistency of its own results. Two decades of austerity budgets and trade liberalization have failed to reduce global poverty, and have only aggravated the divide between those who have access to opportunity and those who do not. The latest version of liberal capitalism has certainly increased both the quantity and the concentration of global wealth, but cannot claim to have promoted equitable development. Major economic shocks across Asia, Russia, Brazil and Mexico have also shown that rapid liberalization dramatically increases volatility in financial markets, to the benefit of nobody except currency speculators. Some of those who preached that markets alone would solve the problems of the global south now grudgingly recognize that the state must be actively re-engaged in important aspects of the development process. Even the conservative Business Week magazine recently concluded thatIt all adds up to a breakdown of what was known as the Washington Consensus, the world view pushed aggressively by the US Treasury, the IMF and the World Bank in the early 1990s. This dictum held that all countries should open their markets to trade, direct investment, and short-term capital as quickly as possible. The transition would be painful, but inevitably, prosperity would result. In hindsight, it was a naive and self-interested view... If a new Social Contract for the promotion of equitable development is to fill the void left by the demise of the Washington Consensus, it can no longer be forged exclusively between the state and the private sector. Often in response to the hardship engendered by structural adjustment policies, social movements have grown rapidly over the past twenty years, as non-governmental organizations proliferate around the world, from grassroots activists to global advocacy groups. Over this period, civil society has emerged as a viable and authentic third sector, with significant experience and insight to bring to any discussion of how best to balance the wealth-creating and employment-generating potential of private enterprise with legitimate concerns about social and environmental sustainability. If managed appropriately, the active participation of civil society in debates about the next development paradigm promises a way out of the traditional dispute between business and government over ""markets vs. taxation/regulation"" as the best means to promote development. For example, in some cases where private firms doubt the ability of governments to deliver cost-effective ""development outcomes,"" incentives for direct corporate investment in non-governmental service providers can serve as market-oriented guarantees that stipulated goals will be met. Similarly, the role of NGOs in monitoring and disseminating the social and environmental impact of corporate behavior, thereby influencing the decisions of consumers and investors, can discipline the private sector with market-based signals and reduce the need for certain types of regulation. On the other hand, given the fallibility of exclusively market-driven approaches, governments will still need to impose regulations and fund necessary development programs to which inadequate attention is paid by civil society or the private sector. The challenge is thus to build consensus on the priority of certain development outcomes - poverty alleviation, provision of healthcare and education, job creation, ecological sustainability - then negotiate the respective roles of government, business and civil society in addressing these priorities. The ""fine print"" of a new Social Contract must be carefully negotiated among representatives of all three sectors, drawing on the strengths and contributions that each brings to the table. Such negotiation should happen at the local and national level, so as to consider the unique historical, cultural and political factors that govern relations among the sectors in any given region or country. However, representatives must also be mindful of the global context, and consider how their agenda and proposals relate to the broader institutional and systemic environment established by trade agreements, macroeconomic trends and market conditions. A new Global Social Contract (or more appropriately, a series of such contracts to reflect the specificity of each nation or region) promises progress towards the realization of development outcomes, a ""checks and balances"" system to maximize the contributions of each sector without allowing any one of them to assume disproportionate influence.Within this framework, the role of the private sector in the promotion of equitable development is especially important, both because it currently wields the greatest economic power, and because its predominance over the past two decades has stirred such intense debate. During the November 1999 ministerial meeting of the World Trade Organization in Seattle, angry young people smashed windows at Nike and Starbucks stores to denounce unchecked corporate expansion. Several months earlier, a French farmer had become a cult hero for vandalizing a McDonald's restaurant to protest the impact of globalization on local culture. On campuses across the United States, students have forced apparel makers who manufacture goods with college logos to pay more attention to the sweatshop conditions in which they are produced overseas. Anti-corporate outbursts may well reflect a general mood: a Business Week magazine poll this past September found that nearly three quarters of the American people now believe that big business has gained too much control and influence over their lives. This public sentiment, in turn, reinforces a perception common in social justice and activist circles, that large corporations constitute a fundamental obstacle to equitable and sustainable development.On the other hand, community organizations across the South insist that what poor people need most desperately to improve their circumstances are jobs that pay living wages. Even before the era of fiscal austerity imposed on the developing world by two decades of structural adjustment, it would have been impractical to suggest that governments could create enough jobs to meet this demand, much less that employment openings with civil society groups would make up the difference. Implicitly, almost everyone who works to promote equitable development acknowledges that private enterprise plays a major role in employment creation, income generation and the provision of tax revenue for public investment in education, healthcare and infrastructure. From that perspective, business is indispensable to the development process. Too often, the debate about business and development devolves into simplistic and polarizing accusations- business leaders dismiss activists as naïve and impractical, while civil society groups denounce corporate exploitation of workers and environmental destruction. These shouting matches about whether business is ""good"" or ""bad"" threaten to squander opportunities for creative new thinking on equitable development. After all, the issue is not whether the private sector has a role to play, but rather what kind of business activity is most conducive to broad economic enfranchisement and participation. Many business leaders now acknowledge greater responsibility for meeting the social needs that weakened state institutions cannot address. For example, another recent edition of Business Week magazine, predicting trends in the evolution of 21st century corporations, suggests that In 20 years, society's leaders will not be elected politicians but members of the private sector. The onus will fall on CEOs to address issues that were once seen as matters of social policy but which will have become vital to the interests of thoroughly global corporations. ""In 2020 I would see a third of a CEO's time being spent on issues bigger than the company - world education, world health, world peace, the environment.""Increased corporate attention to social and environmental concerns is clearly a positive trend. But if Business Week's analysis is correct, corporate leaders (accountable only to their shareholders) will strike a major blow to democratic citizen control and appropriate balance among the sectors by replacing elected representatives in the formulation of social policy. A more appropriate alternative would involve tri-sectoral negotiation of the appropriate contributions that business, government and civil society could make to address the urgent need for more equitable development processes around the world. Though there will be many debates about what exactly are the appropriate roles and contributions for each sector, at least some voices in the business community accept the need for evolution in our thinking about the rights and responsibilities that inhere in a new social contract."