Thursday, August 20, 2009
In between my crazed travel schedule, I forgot to link to this WSJ story which extensively quotes me. The story had originally appeared in Knowledge @ Wharton and was reprinted in the Journal. The story is titled "The Poor as Stakeholders: Can Inclusive Capitalism Thrive in India?" Here are the portions that quote me, though the entire story is worth a read.
Reuben Abraham, assistant professor and director of the Emerging Market Solutions Initiative [Ed Note: It should read Exec Director and Centre for Emerging Markets Solutions now] at the Hyderabad-based Indian School of Business (ISB), points out that business success must come first. "At its core, Fabindia is a sourcing business," he says. "Everything else that they do -- making weavers [into] shareholders, etc. -- is peripheral to their main activity."
"Capitalism at its core is basically agnostic," says Abraham of ISB. "It does not try to be inclusive or exclusive. Capitalism is about optimal allocation of resources. The more it is allowed to thrive, the higher the number of people who will be impacted positively by [its] growth. So, in that sense, being inclusive is perhaps a natural process. But for this to happen, what is really needed is more liberalization and fundamental reforms. For instance, until 1995 the fruits of telecom were not available to 95% of the country. Because of the reforms in this sector, [they are] now available to 50% of the country.... In this sector, capitalism has become a force for good. We could have the same thing happen over and over again in different sectors."
Corporations naturally go for high-margin customers in the beginning, Abraham notes, but given that there is a very small number of high-margin customers in India, they will have no option but to look at other segments of the population. "These are natural consequences of a well-regulated market at work. The problem really is: What is the optimal amount of regulation in a sector and who decides that? In my opinion, it is an iterative process. This is a journey that needs to be figured out by trial and error."
If regulatory reforms don't take place, "corporations will be forced to do inclusive capitalism [Ed Note: Not sure what this means]. Otherwise, there will be social unrest. The issue then will be about the level of commitment of the corporates given that they always have to walk the thin line between their responsibilities toward the shareholders and the society at large."
Reforms are the key, Abraham says. As an example, he notes that various studies show that urban slum dwellers are willing to spend as much as 30% of their household income on educating their children in private schools. "This means that demand clearly exists. The reason that supply does not exist to meet this demand is because of regulations that don't allow profit-making in education."