Responsible capitalism

Over the two centuries since the word was coined, capitalism has had a mixed press. Its critics have been particularly trenchant. As a result, whether it is the rapacious mill owners of 19^th Century Lancashire so vitriolically lampooned by Karl Marx, or the self-lampooning of the larger-than-life figures of recent Wall Street scandals, responsibility and capitalism have not always seemed easy bedfellows.

However, it is important to recognise that abuse and excess are not the essence of capitalism. Capitalism is fundamentally anchored in the ability of individuals to realise their potential through an exercise of their individual rights. And the success of this approach has been seen, as capitalism has supported more prosperity for more people than any other system ever. Enterprise is the source of goods, services and jobs – and not only for the rich. Capitalism - and the dynamic private sector which it supports - has been responsible for lifting millions out of poverty across the world, to which the two emerging economic powerhouses of India and China bear the most eloquent of current testimonies. It is only through continuing to realise the potential of this system that our shared goal of eliminating absolute poverty can be achieved.

Within the Commonwealth – a diverse, voluntary association of 53 nations in all continents and embracing all cultures – there is recognition that whilst it is easy to equate capitalism with sharp suits and skyscrapers, the reality of capitalism for the majority of Commonwealth citizens lies in the small firms where families and neighbours work side-by-side. SMEs constitute almost 90% of most economies: they are the dynamos of growth. And now, nearly every nation on earth embraces some form of capitalism.

With examples of irresponsible capitalism so evident, the challenge is to recognise how ingredients which provide the strength of the capitalist system can be combined so that it works sustainably for all people. In other words, we are asking how to bring about a responsible - democratic - capitalism. The ingredients of economic development only take on real shape when they are made democratic. Hence the need to promote all business activity – as much for small businesses and women and youth entrepreneurs, as for big business. And hence, too, this need for responsible business – accountable socially and environmentally as well as financially. ‘Good’ business, they say, is good for business, and it is democracy that ought to lie at the root of capitalism.

The form of capitalism a society expresses reflects choices: by individuals and companies, through the exercise of their economic rights; by governments, as embodiments of the society’s collective will; and, increasingly, by the international community as a group. It is the interaction of these three groups which defines the extent to which capitalism in all its forms is responsible or not.

It is government which sets the parameters within which any economic system works. The building blocks of efficient and responsible capitalism are amongst the fundamental responsibilities of any state. The first prerequisite is a system of individual property rights through which the freedoms of individuals to trade goods, labour and services are protected. The second is a judicial system able to enforce these rights, on behalf of all.

The Commonwealth invests heavily in both these areas. Democracy at all levels of society – national, regional and local – ensures that the rights of all individuals are respected. Through the transparency and accountability of the democratic process, government becomes responsive to the needs of its citizens. The Commonwealth firmly sees a connection between this accountability, the safeguarding of individual rights, and economic and social development. Capitalism can only work where there is confidence in the future, and in the knowledge that investment today will be rewarded by the ability to realise a return on that investment tomorrow. Democratic accountability and an equitable judiciary together combine to provide a bulwark against the arbitrariness which can undermine that confidence. It also ensures that it is more profitable to build a business than to manipulate the political system based on patronage or corruption.

In the modern state, these two fundamental roles of government find a more elaborate expression in the form of regulation. On the one hand, regulation plays a permissive role. All governments have processes which need to be undertaken to set up and close down businesses. A key part of the vibrancy and effectiveness of the private sector is determined by these processes, and the state’s role is to ensure that they are applied efficiently – balancing the need for protection of the public with releasing economic potential. Commonwealth countries have a good track record of delivery in this area: two members – Singapore and New Zealand – top the World Bank’s ‘Doing Business’ rankings, and only two members lie in the bottom quartile. And increasingly, Commonwealth member governments commit to practicing what they preach, for instance with Nigeria and Ghana committing to making public all their revenues for oil, gas and mining, under the UK-led Extractive Industries Transparency Initiative.

The Commonwealth plays a modest role in this achievement by providing support to implement best practice in supporting the business environment and strengthening the ability of small and medium sized firms to find the finance they need to grow, and to provide employment. It also plays a growing role in supporting governments in bringing young people within the economic system. More than half the Commonwealth’s population is under 25. Commonwealth programmes support education in financial literacy, since an understanding of money, its potential and limitations, is a key step in the creation of economically responsible citizens. More fundamentally, the young are an untapped entrepreneurial resource, and the Commonwealth is looking to ways to engage and develop that potential. The Commonwealth Youth Credit Initiative has set up some 2,000 youth businesses: over 90% of loans made have been repaid, in a package that includes loans, skills building, marketing and management, and business counselling and mentoring.

In addition to its permissive role, government has a vital function in establishing the hard boundaries to capitalism. This has been illustrated vividly in recent months with the debate over the role of government in the regulation of the financial sector. However, it applies at least equally to other forms of regulation, for example in health and safety and environmental protection. These regulatory norms are themselves expressions of a society’s assessment of what activities and risks are acceptable. In all these ways - regulatory, legal and political - responsible capitalism is fundamentally supported by an efficient, transparent and accountable state.

Yet while governments may set the parameters within which capitalism operates, it is the millions of individual capitalists who bear the greatest burden for ensuring that capitalism operates responsibly. It is increasingly clear that responsible capitalism is about more than making money. Environmental sustainability underpins all human activity, but is literally undervalued in the current economic system. A responsible capitalism must continue to recognize that sustainable development must be secured, and that innovation will be needed to achieve it. As a result, in the same way as governments are accountable through openness and transparency, business needs also to be accountable for its environmental and social performance. Examples of ways in which this can be achieved can be seen across the full capitalist spectrum. In the largest companies of the world there is an increasing move towards recognizing the value of the ‘triple bottom line’, through which environmental and social measures supplement the financial. At the other end of the scale, the philosophy underpinning the microcredit movement - where finance is put to the service of social objectives - demonstrates how innovative thinking can put responsibility where it should always be, at the heart of capitalism.

And the Commonwealth family is supporting this effort as well. The attention paid by firms to their corporate social responsibility is an important manifestation of this greater attention to the obligations of businesses to the societies in which they operate.

For the Commonwealth, responsible capitalism is ‘on the statute books’. The Commonwealth Business Council presented guidelines to Commonwealth Heads of Government in Abuja in 2003, and they were formally endorsed there. Those guidelines took the form of a so-called Joint Plan: six promises from Government, seven from Business, and two from Government and Business together. The Plan has been tested in Ghana, Mozambique and Tanzania – in each, a climate of dialogue has led to a climate of investment. Meanwhile, alongside the Joint Plan are the Commonwealth Business Council Guidelines for Corporate Citizenship – on company values, company corporate governance, company relationships, and the assessment of the different types of company impact.

The CBC itself gives practical support, and collects examples of best practice. It has amassed exceptional testimony from companies supporting health in the workplace and the community (from AIDS, to dental care, to water sanitation), and from companies supporting education and skills development, and the development of small enterprises. It has produced innovative analytical tools for helping its members understand and monitor their efforts in promoting corporate social responsibility.

So responsible capitalism must be inculcated by governments and companies. So, too, must it be established as a shared goal for the international community.

As the world becomes increasingly economically and culturally interconnected, ensuring responsible capitalism becomes an international as well as a national obligation. Commonwealth countries are more fully integrated with the global trading and financial system than others. As a result, the membership is genuinely committed to finding multilateral solutions to global challenges. Neither individual Commonwealth members, nor the Commonwealth as a group, can solve these problems alone. As a result, the Commonwealth recognises that responsible capitalism is best supported by a rules-based international system. This is particularly true of the global trading system. Rules provide protection for small countries – which form 32 of the Commonwealth’s members. Without the ability to exchange goods and services through trade, there can be no capitalism. A responsible global capitalism requires a successful conclusion to the Doha Round of trade negotiations, which genuinely benefits developing countries and which recognises the particular challenges faced by small states. Only an equitable outcome will be for the benefit of all.

But the need for effective multilateralism to support responsible capitalism is wider and deeper than this. For illustration, we look no further than the mismatch between global financial flows and national financial regulation in the current economic and financial crisis. Here, and more generally, there is a need for effective international institutions to support multilateral co-operation. Commonwealth leaders are fully committed to strengthening the effectiveness of the global institutions, and in June 2008 set out principles to guide the reform and promote these institutions’ transparency, effectiveness and - above all - their inclusiveness. Their hope is to move the world from a narrow globalisation to a shared globalism, in which all can realise the benefits of responsible capitalism.

It may seem that in the last two years there has been a serious challenge to capitalism as the dominant model of economic development. That would be to underestimate its underlying strength. However, what has been learned is not that capitalism has failed, but rather that it needs nurturing and guiding to prevent its successes becoming excesses. For millions of people striving to reach their potential and to achieve greater prosperity, it remains responsible capitalism that has the greatest ability to fulfill those hopes.

ENDS