The Natural Edge Project The Natural Advantage of Nations Whole System Design Factor 5 Cents and Sustainability Higher Education and Sustainable Development




"The authors of this book (The Natural Advantage of Nations) (have) the energy, insight and commitment to begin the discussion of what I call 'the ultimate integration'; that is, integration of the concepts of competitiveness and Natural Capitalism."
Michael Fairbanks, Co-Author 'Plowing the Sea: Nurturing the Hidden Sources of Growth in the Developing World' Chair, On the Frontiers Group




  


Foreword by Michael Fairbanks


‘The Latest Best Chance’: Prosperity, Competitiveness and Natural
Capitalism – the Ultimate Integration


Last year I received a call from the authors of this book. We had mutual friends in Amory Lovins, Hunter Lovins and William McDonough. These ‘new’ authors from Australia (most innovation comes from the periphery!) impressed me with their earnest commitment to integrate the concepts of Natural Capitalism and competitiveness. They knew all the literature; they had a vision; and the vision was correct, something that I dreamed of myself for some time, but had precious little to show for it. By the second or third phone conversation between Australia and my home in Massachusetts, I knew that I was speaking to people who had the energy, insight and commitment to begin the discussion of what I call ‘the ultimate integration’; that is, integration of the concepts of competitiveness and Natural Capitalism.


This new book teaches us to think that there are four constituents to any business model: purchasers, shareholders, employees and future generations.(1) All business models serve the purchasers, or the business model wouldn’t exist. Most serve the shareholders or the business model wouldn’t exist, for long. Fewer still serve the workers of the world; and in fact, there are only a handful of countries where workers participate in the value created in a business model; and even in these few countries there is precious little thought to future generations. That is what this book is about. How can we create business models that serve all the constituents that we think of in the present; but how do we make sure we leave the world better off; how do we think intergenerationally when it comes to business models; indeed, how do we create value for future generations? My view is that we need to consider two upgraded concepts that come before Natural Capitalism, in order to get the most out of it: ‘What is Prosperity?’ and ‘What is Competitiveness?’


What is prosperity?

Prosperity is the ability of an individual, group or nation to provide shelter, nutrition and other material goods that enable people to live a good life,(2) according to their own definition. Prosperity helps to create the space in peoples’ hearts and minds so that, unfettered by the everyday concern of the material goods they require to survive, they might develop a healthy emotional and spiritual life, according to their preferences. We can think of prosperity as a flow and a stock. Many economists view it as a flow of income; the ability of a person to purchase a set of goods, or capture value created by someone else. We use an improved notion of income called purchasing power.(3) Prosperity is also the enabling environment that improves productivity. We can therefore look at prosperity as a set of stocks.(4)

There are seven kinds of stock, or Seven Forms of Capital, the last four of which constitute social capital.(5) In this conceptualization we see all forms of prosperity falling into the following categories: natural endowments such as location, sub-soil assets, forests, beaches and climate; financial resources of a nation like savings and international reserves; man-made capital which includes buildings, bridges, roads and telecommunications assets; institutional capital such as legal protections of tangible and intangible property, government departments that work with little hidden costs to the economy, and firms that maximize value to shareholders, and compensate and train workers; knowledge resources such as international patents and university and think-tank capacities; human capital which represents skills, insights, capabilities; and culture capital which means not only the explicit articulations of culture like music, language and ritualistic tradition; but also attitudes and values that are linked to innovation.


Moving away from a conceptualization of prosperity as simply a flow of per capital income, enables us to consider a broader system, and the decisions for investment in an enriched and enabling, ‘high-productive’ environment.(6) Nobel laureate Amartya Sen suggests that: ‘The advantage of a stock view would be to give us a better idea of a nation’s ability to produce things in the future’.(7)


Why does prosperity matter?

We know that individuals around the world have vastly different purchasing powers and countries possess stocks of wealth in different proportions. According to Thomas Sowell, ‘We need to confront the most blatant fact that has persisted across centuries of social history – vast differences in productivity among peoples, and the economic and other consequences of such differences’.(8) Recent reports by the World Bank indicate that the standard of living in many regions in Africa, Latin America and Asia are being threatened because of declining productivity. There are intimate connections between poverty and malnutrition: muscle wastage, stunting of growth, increased susceptibility to infections, and the destruction of cognitive capacity in children; but poverty is more insidious than statistics can indicate. Poverty destroys aspirations, hope and happiness. This is the poverty you can’t measure, but you can feel. There is a rich literature on correlation between incomes and such progressive human values as: productive attitudes toward authority, tolerance of others and support of civil liberties, openness toward foreigners, positive relationships with subordinates, self-esteem, sense of personal competence, the disposition to participate in community and national affairs, interpersonal trust and satisfaction with one’s own life.(9) Ronald Inglehart writes that higher rates of selfreporting of both objective and subjective well-being are correlated with the levels of national prosperity.(10)


What is competitiveness?

Nations that don’t create wealth for its citizens share much in common. Our evidence, and that of others,(11) suggests that they are over-reliant on natural resources, including cheap labour; and that they believe in the simple advantages of climate, location and government favour. Because of this they often do not build the capacity to produce differentiated goods and services that create greater value for demanding consumers who are willing to pay more money for these goods. By focusing on these easily imitated advantages, on these lower forms of capital, they compete solely on the basis of price and, therefore, tend to suppress wages. Keeping wages low is what I call competing tosee: ‘which country can stay the poorest, the longest’. It is exports based on poverty, not exports based on wealth creation; and the only competition they are in is to see which country can stay the poorest the longest until its society disintegrates. A nation’s ability to create both price and non-price value for consumers inside and outside the country is what determines its productivity and, therefore, its prosperity.(12)

One can categorize the many competitiveness choices available to firms and governments as follows:

The micro choices of competitiveness focus business strategy on an integrated set of choices designed to achieve a specific set of objectives in an informed and timely manner. We see few strategies of companies in developing nations that are informed by good research, made explicit, and shared by the firms’ leaders. We have found seven patterns of uncompetitive behaviour at the microeconomic level: overdependence on natural resources and cheap labour, poor understanding of foreign customers’ buying preferences, lack of knowledge of competitor activities, poor inter-firm cooperation, lack of forward integration into global markets, a paternalistic relationship between government and the private sector, and a high amount of defensiveness among government, private sector, the unions and the press. These seven patterns are the norm of companies in countries where the average citizen does not have a high and rising standard of living.(13) The results of these seven patterns are simple exports which compete on price and, therefore, low wages, in an increasingly demanding marketplace which provides fewer returns. Mitigating patterns of uncompetitive behaviour requires a set of firm-level choices around structuring new learning and decision-making. For inside each of these patterns lies a hidden opportunity for creating prosperity.

The macro choices of competitiveness are the extent to which the government supports the private sector. Some say that government needs to do more for the private sector, and some say government needs to get out of the way. If we characterize government choices around its level of intervention in the economy we can see a broad range of choice between classic socialism and monetarism.(14) In Cuba, the government has become overresponsible for the welfare of the average citizen; supplying housing, health care, education, jobs, food and even entertainment and news. Ownership is by the state and accomplished through collectives and accompanied by centralized planning which uses quantitative targets and administrative prices. Income distribution tends to be even, and growth tends to be low. The monetarist approach is a sparse but rigid social contract between government and the private sector that says: government will create a stable macroeconomic environment and the emerging private sector entrepreneurs will create growth. This strategy emphasizes stabilizing markets, freeing wages and the currency exchange rates, and allowing markets to develop. This strategy appears to create, especially in the near term, more poverty and greater gaps in income. It fails to acknowledge that the government has a role in the innovation process. In my view, it is an overreaction to the failed policies of government intervention, such as import substitution which was so popular in Africa and Latin America in the 1970s and 1980s.


My view is that the government needs to do everything it can to help the private sector succeed, except to impede competition. This means investing, or helping the private sector to invest, in the higher forms of capital. In poorer countries, government will have to do more than in richer countries. The relationship has to be customized, based on a nation’s stage of growth, and the innate capacities of each sector to contribute. I believe that if these competitiveness choices, these micro and macro choices, are informed and bounded by the principles of Natural Capitalism, we produce the best chance to build business models that create value for all four constituents: purchasers, shareholders, workers; and perhaps most important, future generations. I also believe that The Natural Edge Project, this group on the periphery, has produced the latest, best effort for learning how to do it.


OTF Group
Boston, Massachusetts
September 2004

 

1 The four constituents are from the forthcoming book, The Prosperity Event: How Business Strategy Transforms Nations, edited by Michael Fairbanks.

2 Ray, D. (1998) Development Economics, Princeton University Press p9.

3 Ibid, p12.

4 Amartya Sen discusses the difference between a stock and flow in The Concept of Wealth (1996).

5 Michael Fairbanks developed the heuristic of the seven forms of capital through a metaanalysis of recent literature on economics and social capital. Examples of the latter include: Coleman, J. S. (1988) ‘Social Capital and the Creation of Human Capital’, American Journal of Sociology, vol 94, Supplement, pp95–120; North, D. C. (1990) Institutions, Institutional Change, and Economic Performance, Cambridge University Press, New York; Olson, M. (1982) The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, Yale University Press, New Haven); and Serageldin, I. and Dasgupta, P. (1997) Social Capital: Integrating the Economist’s and Sociologist’s Perspective, World Bank, New York.

6 For the best practical example of this view of prosperity, look at James Wolfensohn’s internal, but now widely accessible memorandum on the Comprehensive Development Framework (CDF), spring of 1999. The president of the World Bank has begun to implement a ‘holistic’ approach to development, around the concept of a ‘social balance sheet’.

7 Sen, A. (1996) ‘The Concept of Wealth’, in Myers, R. (ed) The Wealth of Nations in the Twentieth Century: The Policies and Institutional Determinants of Economic Development, Hoover Press, Stanford University Stanford, California p7.

8 Sowell, T. (1998) Conquests and Cultures, Basic Books, New York p329.

9 Much of this rich literature is synthesized in Inglehart, R. (1997) Modernization and Postmodernization: Cultural, Economic and Political Change in 43 Societies, Princeton University Press.

10 ibid, Ch 1, demonstrates these connections with the World Values Survey in the early part of this decade and concludes that ‘far from being randomly related, cultural, economic and political variables are closely related’. This survey provided a broader range in the variation of data than had ever been available before. It is drawn from over 56,000 respondents in 43 countries representing 70% of the world’s population. They varied from populations with a US$300 per capita income to US$30,000; and from long established democracies with market economies to just-former socialist countries, and authoritarian regimes. And these conclusions often appear to hold across levels of education, occupation and income. He also reports that for richer countries there is a point of diminishing returns where the subjective values become more important than the objective values.

11 Sachs, J. and Warner, A. (1995) Natural Resource Abundance and Economic Growth, National Bureau of Economic Research, Cambridge, MA.

12 Krugman, P. (1994) ‘Does Third World Growth Hurt First World Prosperity?’, Harvard Business Review, June–August, pp113–121.

13 Fairbanks, M. and Lindsay, S. (1997) Plowing the Sea: Nurturing the Hidden Sources of Growth in the Developing World, Harvard Business School Press, Boston, Chs 1–7 (with a Foreword by Michael E. Porter) Chs 1–7.

14 Classic socialism: Cuba and North Korea; monetarism: Chicago school, Chile between 1973 and 1983, Thatcher’s United Kingdom. Keith Griffin (1989) at Berkeley categorizes four other archetypes.