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The Real Competitive Advantage

Business theories are often formulated to justify an underlying objective stemming from a perception of the firm’s competitive advantage . And, with the increasing influence of business interests on the formulation and execution of public policy there is a tendency to avoid deep analysis that might reveal a lack of intellectual integrity or the fallacy of the assumptions in either the business theory or a public policy that in fact is heavily weighted to benefit one or more business interests. unnamed63caratovaldiamond

The problem is that fallacious assumptions underlying the rationality of certain policies can lead to unintended negative consequences for the business, the sector or the government partner implementing the policy. In particular, the environmental and/or labor impacts on local populations of a business venture that is resource extractive are often glossed over, especially if the business action is being conducted in the developing world. This could happen, for example, for U.S. Agency for International Development (AID) projects or for World Bank projects if the full range of impacts to local populations is not accounted for. This could also happen in a less overt manner when financial liberalization is advocated and implemented (by a government) and the private lending institutions issue loans for development projects based solely on economic or financial measures of success. In other words, this happens when the externality costs are not factored into the equation.

This practice has sometimes led to the loss of credibility by companies seeking to improve their global brand image. Hence, the competitive advantage that was the objective at the onset is lost due to the company’s and the corroborating government’s inability to account for the systemic impacts of certain public policies on human populations.

International trade theory in its expression as “globalization” is an amalgam of ideas and concepts from several different academic disciplines including economics, finance, political science, sociology and others. The benefits of globalization have been articulated by many, including myself. However, more recently it may have fallen prey to missteps in its spread and manifestation in the developing world due to several overly self-interested public and private actions. The mismatch between the dream of the benefits of globalization and the nightmare of the brutality of it (as it has manifested under the auspices of the Washington Consensus ) is being recognized in many quarters around the world. This suggests that market fundamentalism should be subjected to a much more rigorous analysis that takes into account many factors above and beyond the macroeconomic measure of well being.

A call for more comprehensive and systemic analysis as part of public policy decisions has come from many different sources. For example two Nobel prize-winning economists, Joseph E. Stiglitz and Amartya Sen, recently co-led a Commission that urged the adoption of new assessment tools for measuring Gross Domestic Product that incorporate a broader concern for human welfare than just economic growth. Similarly organizations like the New Economics Foundation (NEF), based in London have argued for alternatives to one-dimensional analysis that does not take into account broader measures of well-being.

There is a tide of global consciousness that has arisen as a result of the fallout from the economic crisis of 2008/2009. This global consciousness reflects the interest of millions of people who are no longer willing, from a basic ethical point of view, to stand witness to the massive amount of human suffering that has accompanied globalization both in the developed and in the developing world. Much of the suffering stems from the mismatch between the needs of a “free market in financial services” and inadequate political and social infrastructures in some countries. Country risk analysis (CRA) as a standard practice within the financial sector would surface the risks, if the models used were robust enough to account for externality costs. However, even with CRA, for those countries that do not provide for rule of law, no amount of statistical analysis will suffice. The decision to invest has to fall back to a group of humans that make the go/no-go decision. Wouldn’t it be nice if management teams were all trained to recognize the role of project development within the broader context (socioeconomic, geopolitical and environmental) of the region?

The existential nature of this globalization paradox is driving more and more grass roots movements to challenge traditional institutional responses to the economic, social and humanitarian crises of today. The concept of “fair trade” in all of its guises and configurations (see my September 30th Article) is especially germane to this analysis. The deep ecology of fair trade needs to be explored and examined more fully by decision makers that hope to ameliorate the impacts of projects. Perhaps programs can be integrated into infrastructure projects that help to empower the local population and compensate them more adequately for their opportunity costs when impacted. These types of policies could even address forward-looking prospects such as the Millennium Development Goals (MDGs).

Perhaps this requires another look at the term “competitive advantage” as it is used in private sector decision-making and in the field of international economics today.