Private Enterprise & Common Sense

SUSTAINABLE DEVELOPMENT
IN LATIN AMERICA

PRIVATE ENTERPRISE
& COMMON SENSE

Business Council for Sustainable Development - Latin America

1. BELIEF IN A VISION
We, the members of the Business Council for Sustainable Development-Latin America (BCSD-LA), believe in the basic values of sustainable development, as laid out in the key documents of the 1992 Earth Summit (UNCED), attended by more than 100 chiefs of State, and as portrayed in our own 1992 book, Changing Course, A Global Business Perspective on Development and Environment.
Despite the many economic reforms implemented in our region during recent years, our common sense tells us that Latin America has yet to find a path towards forms of progress which can sustain its people, its businesses and its governments over time, and which we can sustain. There have been many false starts and false promises of new eras in the history of our region.
Thus while we continue efforts to reform our companies and institutions, we must also continue to seek answers to the basic question: how to secure forms of sustainable economic growth that give everyone more opportunities while maintaining our natural resources, the basis of all progress.
Our common sense tells us that we must change our own ambitions, away from consuming more to saving more, investing more, and trading and producing more efficiently, using less resources. All of this must be matched by a deep and comprehensive reform of our institutions.
Such changes are motivated both by our own personal desires for a more sustainable society for our children, and by our much more immediate need to keep up with changes in global competition which alter our comparative advantage in trade and production. The purchasing power of world markets and the emerging influence of civil society also urge us towards environmentally and socially sound forms of production, consumption and commerce.
Common sense also tells us that we can find and implement solutions only in cooperation with others. However, we must not shirk from offering leadership. We have a vision; we intend to communicate that vision, to build new alliances around it, to work with others to refine it, and to make it real.
Our vision stems from several other common-sense observations:
First, competitiveness and efficiency are crucial to business success in the merging world economy. Open markets demand better quality/price relations, faster services, and accelerating innovation. Competitiveness involves efficiency in the use of all resources: natural, human, social, institutional and financial. Know-how, motivation, employees' abilities and education levels, and access to information and ideas are of ever-increasing importance. The wise use of resources is more important than the availability of cheap natural resources; and the value added in the production of goods and services is more important than raw material exports.
Second, economic growth is not sustainable without social progress and environmental protection. As business leaders, we know that poverty is both morally and economically unacceptable; it is degrading to human dignity, and an impoverished population, by definition produces little and consumes little. Many of our often inefficient and expensive formal markets place a ceiling above people’s efforts to escape from poverty by forcing them and holding them in the region’s vast informal markets. Reducing poverty is both a social and an economic need, as well as an environmental priority, given the tight links between poverty and the inefficient use of resources, and between poverty and migration to the cities. Social progress must then become a respected element in judging companies’, communities’ and countries' overall performances. However, both common sense and hard experience have shown us that social progress cannot be achieved by relying on government provision of all key goods and services, but must be based on governments enabling people to achieve for themselves access to opportunities, to credit, to education and to jobs.
Third, sustainable development requires a long-term vision. Insecurity, rapid changes in framework conditions, unreliable and unpredictable rules, and uncertain property rights undermine the confidence and predictability necessary for investment and lead to short-termism. Our institutional reforms must encourage trust in the rules of the game, credibility of institutions, the application of the law, and justice for everyone. All of this implies public and private institutions that are independent, efficient and accountable.

2. AVENUES FOR ACTION

2.1 Eco-efficiency in Firms and Infrastructure
Eco-efficiency is the primary means by which businesses help nations move towards sustainable development, while at the same time improving their own competitiveness. The concept means adding ever more value using ever less materials and producing ever less pollution. Eco-efficiency fits perfectly within the goal of Total Quality Management, which is crucial to competitiveness.
The following elements are crucial in achieving higher degrees of eco-efficiency:
Keep business operations clean and systematic;
Apply preferably certified environmental management, quality, security and occupational health systems ;
Reduce material intensity in the production of goods and services;
Reduce energy intensity in the production of goods and services;
Increase material recycling;
Maximize the sustainable use of renewable resources;
Improve product durability;
Dispose of waste in efficient and environmentally acceptable ways.

Businesses that follow these paths will be more innovative, more productive, and thus more competitive. So it is also in our self-interest to encourage eco-efficiency in our partners, suppliers and customers.
The same principles also apply to small businesses, which account for nearly 90% of all enterprises in Latin America, many of which operate in the informal sector. Each unit of production is capable of only relatively minor damage to the environment because of its size, but the cumulative effects of so many small units are serious and costly. Many small firms are learning that eco-efficiency is a lot more about savings on raw materials and lean production than about the environment.
The concept of eco-efficiency should also be applied to the planning, building, maintenance and management of infrastructure: water, energy, roads, railways, communications, harbors, urbanization and waste disposal. This is an issue as much for business as for governments as globalization leads to more privatization of infrastructure. But it must be remembered that firms’ growing ability to find commercial opportunities in infrastructure also implies growing environmental and social responsibilities.
2.2 Human Capital
Common sense tells us that if international markets flourish and opportunities for large corporations increase while local markets stagnate and opportunities for ordinary people diminish, then Latin America will become once again a region of populist politics and government-run economies. It is obvious that along with the creation of financial capital, there must also be an emphasis on other forms of capital, including the social and the human.
What is less obvious is the appropriate role of business in social issues. We are seeking answers. In the meantime, some enterprises will find business opportunities in providing private health care, education and infrastructure. Some will see involvement in the education and health of workers, their families and neighbors as being in their enlightened self-interest. Some will be involved in more traditional forms of charitable acts and charitable thinking.
However, there is a small but growing feeling among business people -including those of the BCSD- LA- that if it is the job of governments to enable while citizens, businesses and non-business organizations act, then business should work with governments and others to help determine the policies behind both the enabling and the acting. There follow some thoughts toward policy reform:
We favor improvements in education at all levels. Experience has shown that investing in the education and training of people -especially women- contributes not only to reducing poverty, but also to maintaining a healthy demographic growth. Vocational and technical training has similar importance, and may be planned and implemented as a joint-policy program between the public and private sectors.
We wish to promote small business activity, as these firms provide more than half of the jobs in the region. This sector needs greater access to credit, know-how and innovations, as well as to markets in their broadest sense. They do not need artificial incentives, but the elimination of all kinds of obstacles in the areas of regulations, taxes, licenses and labor flexibility.
We are willing to promote new and more efficient schemes for health care and social security, including pensions and medical insurance, which are only possible if there exist efficient and privately- owned institutional savings programs. Few countries have found ways of successfully promoting such schemes. However, Latin American states must move in this direction, developing systems with more market orientation that allow for a certain degree of competition, and thus, more efficiency and a high degree of trust.

2.3 Framework Conditions
Better legal and political conditions are necessary to achieve sustainable development.
Macroeconomic stability is crucial to generate the confidence which fosters investment and savings. There is a growing global consensus over the need for economic policies that promote low inflation, privatization of state-owned enterprises, a stable currency, controlled public debt, fiscal balance and improved international trade.
Much of the successes of such policies are better seen in aggregate figures, rather than in significant microeconomic successes. This divide can cause political and social problems. We must firmly continue with macroeconomic reform, giving clear signals to the markets during the next ten years. Our societies must free themselves from the mentality of inflation, which has had such disastrous effects; we must rid ourselves of the illusion that governmental or international aid will solve our problems; we must accept the fact that we can only spend what we have earned.
We must clearly understand which are the incentives and which the disincentives. Some government incentives -affecting the prices of raw materials, goods, services, capital, labor and technology- are merely market distortions which usually operate against the principles and objectives of sustainable development. Most subsidies work against sustainable development by encouraging resource misuse, and should be eliminated. Adequate pricing is especially important for all environmental issues, in assuring rational payment for resources and for sinks for waste disposal.
Firms will increasingly have to internalize these costs by applying them to products and processes, so the costs can be transferred to the market. Firms will look for ways to reduce the costs associated with the use of natural resources and energy, and design new systems, processes and products that reduce environmental impact and add value for consumers and society. This process is better encouraged by a combination of economic instruments and self-regulation than by command-and-control measures; it grants firms within a framework of clearly defined objectives a greater flexibility to choose the way to increase resource productivity, prevent pollution, and steer technological and organizational innovation.
We must make the institutional framework more reliable: historic experience has shown societies can take a long-term view and plan for the future only when they trust their institutions. The following urges us to modify this institutional framework:
First, business transactions are often costly and complicated. Financing a growing firm using its own assets as security -standard procedure in the more industrial countries- is difficult, if not impossible, in most of the countries in our region. Financial markets remain underdeveloped, and interest rates remain extremely high. These barriers hinder growth, impede the development of competitive financial markets and discriminate against the poor. The same applies for many licenses and the majority of registries needed to do business. Complicated and anachronistic mechanisms persist; these keep transaction costs high and keep so many entrepreneurs in the informal sector.
Second, insecurity in property rights is common throughout the region. It is difficult and costly to register property, rural or urban, and this keeps property values artificially low. The resulting inefficiency of property markets degrades the workings of other markets, especially those for credit and collateral. Agricultural investment remains low, providing more impetus to rural-urban migration. Unsecured property contributes to uncertainty, short-termism, and low levels of investment.
Third, there are many deficiencies in the legal and judicial system. The mechanisms for conflict solution do not function adequately: extra-judicial mechanisms are inefficient and court mechanisms are so slow and unpredictable that many members of the business community of the region consider them to be useless and even dangerous. The lack of clear rules of the game and of an effective implementation of these encourag corruption. Eliminating the roots of corruption in our societies must be a top priority.
Such concerns -with eco-efficiency, human capital and framework conditions- are all crucial in efforts towards sustainable development. But they are not the obvious concerns of most people -inside and outside of business- worrying about issues such as environmental protection and poverty alleviation. We need more economic and institutional research into the links between the concerns listed above and the goal of environmentally and socially sustainable development, so we have a clear understanding of costs and benefits and can communicate them.
3. NEW ALLIANCES FOR A NEW LEADERSHIP
We are convinced that now is the time to dedicate ourselves and our societies to a transition towards sustainable development, by translating this vision into new ways of thinking and acting and into concrete programs and projects.
This involves radically changing development patterns, recognizing the mistaken assumptions behind and the limitations of many present economic and market policies. This also implies a longer term vision, and more balance among economic, environmental and social objectives.
No individual, group, sector or profession can do it alone. We must increase the will for cooperation. We need a new alliance for leadership that makes sustainable development a concrete development strategy which favors equally both our own generation and future generations. Thus as we assign tasks to government and to business, we realize that each needs the support of the other in carrying out these tasks.
Governments must strongly pursue a second generation of institutional reforms, with incentives, and medium and long-term signals. These reforms must reckon and anticipate costs and benefits of public spending, and encourage increased investment, savings, eco-efficiency and productivity. Governments, with the help of business leaders and others, must:
Generate by consensus simple, transparent and predictable economic, judicial and institutional frameworks for sustainable development that clearly define responsibilities and competencies in the public and private sectors.
Foster high-quality education and training programs according to social and economic needs of countries and of global markets, taking into account the protection of future generations’ well-being.
Apply a national accounting system that measures the value of economic and ecological resources in order to estimate the capital stock in its broadest and truest sense, and be able to measure the depreciation of the resources and fixed assets of capital factors. This will enable us to order priorities among investment, conservation, consumption, and savings.
Business leaders, with the help of political leaders and others, must establish principles, policies and systems that define a vision of eco-efficiency, apply it, and communicate it. We must:
Promote eco-efficiency programs for firms, and involve businesses in the business philosophy that seeks the optimization of three elements: the generation of economic growth, better environmental performance, and more participation in social development through the creation of more opportunities for all.
Support and disseminate eco-efficiency programs for medium and small firms.
Establish Business Councils for Sustainable Development, or like-minded organizations, in all countries as non-profit independent institutions to strengthen business leadership and to cooperate with authorities in the study, design and implementation of measures for the creation of judicial and institutional frameworks suitable for sustainable development.
Strengthen efficient national mechanisms for the improvement and certification of environmental, quality and occupational health management.
It is impossible to be against sustainable development. It is also difficult to support the concept in a world of such large economic, political, environmental and demographic uncertainties. Yet common sense tells us that it is the only rational path. Common sense also tells us that only by creating brave new alliances can we make the rapid progress necessary.